For me, the most enduring and vivid visualization of this theme is the “Night on Bald Mountain/Ave Maria” segment from Walt Disney's masterpiece, “Fantasia.” The scene appears to be one of pastoral beauty and serenity. But soon it becomes clear not all is as it appears. Danger stirs, then is unleashed in mad revelry, until just as the world seems to have no option but to capitulate to the rule of evil, dawn arrives and the demons of the netherworld are driven back, unable to bear exposure to light and truth. Peace is restored to a grateful world.

Related: Read “Policy Issues: ISO Program Revisions“

Similar is the journey taken by insurance practitioners when discovering a policy provision, thought innocent and well understood, is instead revealed to be a potential trap, gap or E&O. Realization slowly dawns, panic ensues, then, hopefully, just as all appears lost, the light shines, the darkness subsides, and peace reigns for another day.

Clearly I unleashed one such provision in my July 2013 article (“Misplaced Terminology”), where in the spirit of liberty and freedom I discussed a few coverage areas I fervently wish to cast away. Here is the pertinent paragraph:

Then point out that the Agreed Value option they thought was specifically designed to eliminate coinsurance not only fails to do so, but actually creates a 100 percent “coinsurance” requirement based upon agreed value shown in the declarations – assuming the optional provision hasn't expired, of course, in which case the original coinsurance requirements are reinstated.

This seemingly pastoral and serene observation unleashed a flurry of emails revealing that, for more than a few readers, what was once thought solid ground had become shifting sand. Alert reader Alex stated the issue clearly and succinctly: “I thought agreed amt in essence waives any coins penalty.”

Perhaps you are thinking, “I thought the same thing” or “Who doesn't know that?” Let me illuminate why I not only consider Agreed Value a possible trap, but also how “Fantasia” illustrates a process whereby when any such puzzling provision reveals itself, one can move from a sense of impending disaster into the peaceful light of a new dawn.

1: Understand danger may lurk beneath what we assume are calm waters.

Just like that pastoral and peaceful scene at the start of the movie segment, too many insurance folks act as if coverage forms and their interpretations are long agreed upon, intent well established and claims outcome obvious. If you only use standard forms and endorsements, you may be correct for most scenarios. But although most days are sunny and bright, even the briefest flash flood or tornado can still lay the countryside to waste. The key is not total paranoia but risk management: learn to recognize the signs of danger, and what steps are available to minimize or eliminate the potential damage.

2. Understand the difference between what at first appears to be total madness from “Well, what did you expect?”

Myriad folk tales, legends and childhood morality lessons convey two simple truths: (1) not everyone can be trusted; and (2) bad stuff happens. When I was a kid trick-or-treating, one of life's pure pleasures was garnering home-baked goods—from popcorn balls to candied apples–from neighbors who may have been total strangers. Even now I salivate at the memory. Yet by the time my kids headed out with their flashlights and costumes, standard practice had become never to trust anything not in its undisturbed commercial wrapper; local hospitals stood ready to x-ray collected candy to be sure no scumbag had inserted razor blades or pins. Although initial reaction to the possibility of such sabotage of an innocent childhood ritual was outrage, over the years we have simply altered our practices and traditions to minimize the danger.

Related: Read “Misplaced Terminology“

So it is with Agreed Value. The danger in the Agreed Value provision in Commercial Property forms is not the provision itself, but in the blind trust in how it works and blind faith it won't go wrong. Here is the the Agreed Value provision in the ISO CP 10 10:

The Additional Condition, Coinsurance, does not apply to Covered Property to which this Optional Coverage applies. We will pay no more for loss of or damage to that property than the proportion that the Limit of Insurance under this Coverage Part for the property bears to the Agreed Value shown for it in the Declarations.

It is evident from my emails such as the one quoted above that many otherwise sage agents are well acquainted with the “outside wrapper” first sentence, but either ignore or slip by too easily the razor blade/pin buried in the second. As Rumpelstiltskin is wont to say in “Once Upon a Time,” “All magic comes at a price.” Beyond the rate surcharge, the “price” of Agreed Value is that the amount of insurance declared must equal the “agreed value.” In effect, the Agreed Value option does suspend coinsurance, but only on the condition you insure for 100 percent of the agreed value declared, or be penalized at time of loss for whatever percentage you fall short of that total. Bottom line: you now have a 100 percent “coinsurance” requirement tied to the agreed value.

3: Now that I see the possible land mine, do I understand what might set it off?

Here we hit the essence of risk management. In “Fantasia,” it is clear what releases the evil hordes is the occasion–All Hallows Eve–and the cover of darkness. We now know if we can but survive this night, hope will rise with the dawn.

Similarly we can now see what may turn Agreed Value from a positive suspension of a possible coinsurance penalty into a possible disaster, substituting an even harsher penalty. The key is whether or not the amount of insurance properly connects to the declared values. And where do these values come from? Not, as some seem to think, from “thin air”; whatever numbers the insured and carrier will agree upon. No, it turns out there is a specific ISO Commercial Lines Manual requirement (Rule 38) on the issue. Here are the pertinent parts:

Statement Of Values

Use Statement Of Values Endorsement CP 16 15 or its equivalent for filing of values by the insured with the company. The values must be the full actual cash values (or replacement cost values if the Replacement Cost Optional Coverage applies) and must be filed annually by the insured. [emphasis mine].

Rate Modification

Multiply the 80% or higher coinsurance rate by 1.05.

Note: No “punt” coverage here. Although value estimates may vary, the rule is clear that the Statement of Values (SOV) must be filled out in good faith with the full (100 percent) ACV or RC values, not just whatever number the insured would like to cover. If you believe a carrier is willing to vary from the ISO requirement, be certain they are using a proprietary SOV form and rule that allows such variation.

Related: Read “Walk the Line“

We've already seen it's the value stated in the Declarations that controls the requirement. And according to the ISO manual, that number comes from the annual SOV form. The total values from the SOV are entered on the Declarations page, becoming the basis for our 100 percent “coinsurance” penalty: Insurance required must be equal to value declared.

So although the manual rate for this provision is an additional 5 percent, an additional “price” is for the insured to meet the agreed value requirement or else face a potentially significant penalty at claim time. This may not seem like the end of life as we know it, but clearly is not exactly what many an insured—or agent—thought they were getting with a “waiver of coinsurance” provision.

4. In the light of a new day (and new knowledge), the darkness recedes and calm is restored.

The Agreed Value provision is not strictly a demon, masquerading as a kindly garden gnome. Assuming the SOV is properly filled out with accurate values at the time of completion—and the insurance amount is then equal to the amount declared from the SOV—then the insured does gain a reprieve from any possible coinsurance penalty if the values at time of loss legitimately differ widely from those on the SOV. Theoretically, the carrier will be okay with this thanks to the 5 percent surcharge and the fact the discrepancy will disappear at renewal when a new SOV is required at the new current values, lest full coinsurance be reinstated.

Just as the misunderstandings and assumptions of innocence that can render an otherwise safe and fun holiday like Halloween into the stuff of nightmares, so the same can be said of coverage provisions. Learn from “Fantasia.” Just as Night on Bald Mountain segues from whirling madness into the unearthly serenity of Ave Maria, so can you emerge from the darkness and danger of potential coverage disaster into the calm of understanding and solving.

This Halloween, help your clients avoid the tricks and embrace the treats. Popcorn provisions and candied coverage for everyone!