What are valued policy laws?
Valued policy laws generally apply only to buildings and structures, and only to losses due to perils specified in the law.
Valued policy laws differ among states, but they are united in purpose — protecting policyholders from claims of underinsurance after a loss.
In general, valued policy laws state that, in case of total loss to an insured building by a specific peril, the amount stated in the policy declarations is considered the value of the structure at the time of loss and is payable in full. Even if the value of the structure at the time of loss is less than the amount of insurance, the insurer may not argue that payment should be limited to the lower amount, the actual cash value. Moreover, in most states with valued policy laws, any policy provision inconsistent with the valued policy law is considered void.
Valued policy laws generally apply only to buildings and structures, and only to losses due to perils specified in the law.
Policy loss settlement provisions
When a state does not have a valued policy law, or the valued policy law applies only to certain perils, then the standard valuation or loss settlement provisions of the policy will apply. In the ISO Building and Personal Property Form CP 00 10, the property is valued at actual cash value at the time of loss unless otherwise specified. If the limit of insurance on the building itself meets the coinsurance requirements, then payment is on a replacement cost basis. Even so, certain property is still covered at actual cash value as follows:
- Awnings/floor coverings;
- Appliances for refrigerating, ventilating, cooking, dishwashing or laundering;
- Outdoor equipment or furniture;
- Stock sold but not delivered at the selling price less discounts/expenses otherwise had; Glass at replacement cost for safety glazing material if required by law;
- Tenants improvements and betterments if repairs are made promptly, or in proportion to the original cost if repairs are delayed; and
- Nothing is paid if others make the repairs for the insured.
Under the Homeowners 3 – Special Form HO 00 03, buildings under coverages A and B are settled at replacement cost if insured to 80% of replacement cost immediately before a loss, and settlement is for the least of: The limit of liability; the replacement cost of the damaged part of the building with like kind and quality and for like use; or the necessary amount actually spent to repair or replace the damaged building. Therefore, if the cost to replace the dwelling is less than the policy limit at the time of the loss, the insured will not receive the policy limit, but just the cost to replace the property.
The HO 3 policy specifically states that the following property is covered at actual cash value, but no more than the cost to repair or replace: Awnings, carpeting, household appliances, outdoor antennas and equipment, whether or not attached to buildings; structures that are not buildings; and grave markers, including mausoleums.
Personal property is also covered at actual cash value, but it does not fall under the valued policy laws in most states.
The policy provisions are different if the property is not insured to 80% of replacement cost; in that instance, the greater of the following is paid, as long as it does not exceed the policy limit: Actual cash value of the damaged portion of the building; or the proportion of the cost to repair or replace, less the deductible and without depreciation, that part of the building damaged which the total amount of insurance on the damaged building bears to 80% of the replacement cost of the building.
For example, the replacement cost of the insured dwelling is $200,000. The insured coverage amount was $100,000. The insured should have had coverage at 80% of the $200,000, which is $160,000. As the insured only had the property insured at $100,000, that $100,000 is divided by $160,000, resulting in 0.625. Therefore, the policy limit of $100,000 is multiplied by 0.625, which means that instead of receiving the policy limit of $100,000 the insured will receive the proportional $62,500 since the property was insured below the required amount.
Not included in the calculation of the replacement cost of a building are excavations, footings, foundations, piers or other support structures below the lowest basement floor, as well as underground flues, pipes, wiring and drains.
In states with valued policy laws, these provisions are overridden in many instances. Some states, such as California, have stipulations in the policy regarding repairing, rebuilding, or replacing that will override the valued policy statute. Other states, such as Kansas, say that the amount of insurance written shall conclusively be taken as the true value of the property insured.
Restricted perils
Valued policy laws often apply to only certain named perils. All states with valued policy laws provide coverage for damage by fire. Some states limit the provision to fire, lightning, windstorm or tornado, and many limit it to covered perils on the policy itself.
For example, New Mexico covers fire or natural disaster other than flood or earthquake while Nebraska covers fire, tornado, windstorm, lighting, and explosion that causes total loss of property. Ohio strictly limits it to fire and lightning, while West Virginia covers fire or perils as otherwise listed on the policy. See the chart for each state’s specific perils.
Exceptions
Accordingly, there are certain provisions under which the valued policy law will not be applied to a loss. Most commonly is when the loss is caused by criminal, intentional or fraudulent acts, or acts intending to misrepresent the facts or deceive the insurance company. Louisiana specifically states that coverage will be voided in event of criminal fault on the part of the insured or any assignees, while Minnesota will not provide coverage if there is intentional fraud or a change that increases the risk to the premises without the approval of the insurer. For example, if a Minnesota insured decides to build a metal forge next to the house that increases the chance of fire without the insurer’s knowledge, and the dwelling burns down, the insurer does not have to pay the whole amount listed in the policy.
Many states do not apply valued policy laws to property that is under a builders risk policy, is under a blanket policy covering two or more buildings, is covered by two or more companies, or covers personal property or appurtenant structures.
Kansas does not apply its valued policy law to new or existing policies where there has been an increase in coverage of 25% or more unless the policy has been in effect for more than 60 days. If a fire occurs within the first 60 days and the insurer pays less than the face value of the policy, then the difference in premium is refunded to the insured. Builders risk policies are covered at the value of the property at the time of the loss. If the structure is only partially completed and is only worth a portion of the anticipated finished value, then the value of that portion is what is paid out.
Other considerations
Aside from the specific perils to which the valued policy law applies and the exceptions under which it does not apply, there are some other considerations. These considerations in general explain what a valued policy is, detail what happens if the property is covered by two or more policies, explain what happens when a loss occurs to something to which the valued policy law doesn’t apply, and provide additional information.
Most states that address a property being covered by more than one policy indicate that the insurers will provide coverage proportionately. Some states consider appurtenant structures separately from the main property, and may pay them at ACV or RCV as per policy provisions.
California allows an insured to have a specific value named in the policy for the building. If so, at the insured’s expense, the insurer will have the property inspected to determine the value of the building. A clause will then be added to the policy stating that the value of the property has been fixed. If the insured decides to not rebuild or replace the property, then payment is for the lesser of the face amount of the policy or the replacement cost of the property.
Louisiana states that the valued policy law applies to inanimate, immovable property in the state if the insurer placed a value on the property and used that value to determine the premium. At the time of loss, no deductions will be made unless a different method was used to calculate the premium charged.
Tennessee states that the insurer is not liable for amounts beyond the actual value of the property at the time of loss. If the insured paid premiums in excess of the actual value, then those premiums will be reimbursed to the insured.
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