06. Valuation, Deductibles, Coinsurance Flashcards
Valuation
The process of estimating what an item is worth
Q: what are four methods of valuation?
- actual cash value ( ACV )
- replacement cost ( RC )
- stated amount
- agreed value ( valued policy )
Actual Cash Value
A valuation method that takes into account an item’s depreciation
- same as fair market value and depreciated value
- ACV offers lower premiums for less coverage
- formula: replacement cost minus total depreciation
Replacement cost
A method of valuation based on the cost of replacing an item at current market prices, regardless of depreciation
- determined through simple market research
Depreciation
An item’s estimated loss of value due to wear, tear, and age
- determined through standard depreciation schedules and estimating software
Annual Depreciation
Replacement cost divided by the item’s useful life
Accumulated Depreciation
The item’s annual depreciation multiplied by its age
Broad Evidence Rule
- ACV does not simply come down to RC minus depreciation
- takes into consideration any evidence available to determine value
Q: what are the characteristics of Replacement Cost
- no depreciation
- based on the replacement cost at the time of the loss
- higher premiums
RC & the Principle of Indemnity
- the insured cannot profit from a loss
- the insurer often waits to pay the full amount until the insured submits proof of replacement
Replacement Cost example
Roberto’s hail-destroyed roof:
- replacement cost (RC) of $10,000
- first check of $6,000 ACV
- Roberto replaces roof for $7,000
- So, insurer sends second check for only $1,000
( total indemnity for Roberto: $7,000
Insurer saves: $3,000)
Functional Replacement Cost
- pays to replace an outdated, obsolete item with a functionally equivalent item - not an identical item
- level of coverage falls between RC and ACV
Obsolescence
- when something is no longer used or wanted despite being in good working order
- usually a result of a newer, improved alternative
- causes rapid depreciation
( walls made of lath/plaster, VCR’s, portable CD players )
Valued Policy ( a.k.a Agreed Value or Guaranteed Value )
A valuation method that assigns a set value to each insured item
- value is determined prior to the insurance policy
- avoids the confusion of assessing appreciation or depreciation
Stated Amount ( Stated Value )
- property value is stated by the insured when applying for insurance
- when loss occurs, policy pays up to the stated amount of ACV, whichever is less
Partial Loss
When insured property is only partly damaged, and repair costs fall within the policy limit
Total Loss
When insured property is damaged so badly that it is not worth repairing
( two kinds: actual total loss, and constructive total loss )
Actual Total Loss
When property is completely destroyed and unrepairable
Constructive Total Loss
When the cost of repairing damaged property is higher than the property’s current value
( insurer may keep the damaged property or deduct its salvage value from the claim )
Fixed Deductible
A specific, set amount
- Tom’s fixed deductible: $500
- covered damages: $3,500
- Tom’s insurer pays: $3,000
- Tom pays: $500
Percentage Deductible
The insured pays a percentage of the insured risk’s value
- Karen’s home insured for: $500,000
- percentage deductible: 3%, or $15,000
- covered damages: $25,000
- Karen pays the first $15,000; insurer pays the balance of $10,000
Franchise Deductible
Policy kicks in only after the loss exceeds a predetermined amount
( if losses are below the deductible, the insurer pays nothing )
( if losses are above the deductible, the insurer pays 100% of the damage )
- franchise deductible: $1,000
- total damages: $1,200
- insurer pays: $1,200
- insured pays: $0
Coinsurance
Encourages the insured to purchase an adequate amount of coverage, typically at least 80% of a property’s value
- financially protects the insurer
- imposes a penalty on coverage for partial losses if the property is not fully insured - 80% of its RC
Property value: $100,000
Co insurance amount: $80,000 ( 100,000 x 80% )
Underinsured: policy limit less than $80,000
Underinsured
When a home is insured for less than 80% of its value
Coinsurance policy
If a property is underinsured, the insurer will only cover a percentage of partial losses
- if multiple partial losses occur, the low premiums are not enough for the insurer to cover all the damages
- the insurer decides if a coinsurance penalty should be applied
How to calculate coinsurance
- Value of dumb bitches house: $100,000
- minimum coinsurance amount: $80,000
- dumb bitches actual coverage: $40,000
$40,000 ( actual coverage ) / $80,000 ( coinsurance requirement ) = 50%
Apply penalty to partial losses
- home suffered partial loss of $10,000
- coinsurance penalty: 50%
- insurer will only pay $5,000 (50% of $10,000)
Deductible
The amount the policyholder must pay out of pocket before the insurer will pay for losses
- let’s the policyholder decide how much risk he is willing to take
- found on the declarations page of a policy
( three types: fixed, percentage, franchise )
( liability insurance NEVER uses a deductible)
