Agreed Value Method

Learn about the Agreed Value method in insurance, a way to determine the value of a property before a loss occurs.

What is Agreed Value Method?

When you purchase insurance, you pay for security against loss of your property and personal items. You expect your insurer will cover the replacement cost of your property, but many policies fall short, leaving policyholders to make up the difference between the actual replacement cost and the amount the insurance company is willing to pay. 

This is where the agreed value method comes into play.

The agreed value method for insurance is a way to determine the value of your property in the event of a loss. The value is agreed upon by you and your insurer ahead of time and is typically based on the replacement cost of your property, including upgrades and appreciation. In the event of a covered loss, your insurer will pay you the agreed upon amount, regardless of the actual cash value of your property.

How Does Agreed Value Method Work?

An insurance company typically uses the agreed value method to calculate the value of an insurance policy. This approach can be used for both personal and commercial policies. Under this method, the insurance company and the policyholder agree on a value for the property or belongings that are being insured. This figure is then used to determine the premium amount and the payout in the event of a claim.

How Can the Agreed Value Method Benefit Property Owners?

An "agreed value" policy on a homeowner's insurance policy means that, in the event of a total loss, the insurance company will pay the policyholder the full amount of coverage, no matter how much the home is actually worth. This can be a huge benefit to homeowners, especially those who live in areas where home values are constantly fluctuating. It can also be a benefit to those who have made significant improvements to their home that may not be reflected in the home's current market value. This type of policy also works well for landlord insurance, as a landlord typically must take into consideration lost rental income in case of a property loss. 

Agreed Value vs. Actual Cash Value

An agreed value policy is one in which you and the insurance company agree on the “guaranteed value” for your home or vehicle before you start the policy. This is different from a stated value policy, in which the insurance company assigns a value to your property.

In insurance, the term "agreed value" refers to a pre-determined value for an insured item that is agreed upon by the insurer and the policyholder, which is different from the cash value of the property. The "actual cash value" (ACV) is the actual value of an item at the time it is damaged or destroyed. This value is typically based on the item's depreciated value, and it is used to determine the payout in the event of a covered loss.

Generally, agreed value policies are more expensive than stated value policies. This is because the insurance company is taking on more risk by agreeing to pay out a specific amount in the event of a total loss.

Agreed Value is better coverage, and with fluctuating values on homes, boats, RVs, and vehicles, it’s recommended you get an agreed value policy to protect the full value of your most treasured assets.  

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