Valuation, Deductibles, and Coinsurance Flashcards
Methods of valuation
- ) Actual Cash Value (ACV)
- ) Replacement Cost (RC)
- ) Agreed Value (Value Policy)
- ) Stated Amount
Actual Cash Value
-A valuation method that takes into account an item’s depreciation
- Same as fair market value an depreciated value
- AVC offers lower premiums for less coverage
- Formula: Replacement Cost minus Depreciation
-Ex.: A 1995 Civic that Bob bought for $13,000 was worth only $1,700 at time of claim because of depreciation.
Replacement cost
- A method of valuation based on the cost of replacing an item at current market prices, regardless of depreciation.
- Can be determined through simple market research
Depreciation
-An item’s estimated loss of value due to wear, tear, and age.
- Can usually be determined with:
1. ) Standard Depreciation Schedules: (based on insurer’s policies)
2. ) Estimating Software.
Types:
- ) Annual
- ) Accumulated
Valuation
Process of estimating what an item is worth
Replacement cost
- A method of valuation based on the cost of replacing an item at current market prices, regardless of depreciation.
- Can be determined through simple market research.
- Ex.: Roberto’s hail-destroyed roof:
- -Replacement Cost 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.
Broad evidence rule
- Used in some states
- ACV does not simply come down to RC minus depreciation
- Takes into consideration any evidence available to determine value
Characteristics of Replacement Cost
- No depreciation
- Based on the replacement cost at the time of loss
- Higher premiums
- Ex.: Sally’s roof is 3 years old. It gets destroyed in a hailstorm, and it will cost Sally $12,000 to replace it. Even though the ACV of the roof was only $8,000, an RC policy would pay Sally $12,000 for the loss.
Reproduction Cost
Cost to produce an exact replica of damaged property in the same manner and materials in which it was originally produced.
RC and 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.
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- Pays to replace an outdated, obsolete item with a functionally equivalent item- not an identical item.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
-Ex.: Walls made of lath and plaster; VCRs; Portable CD players.
Valued Policy (aka: agreed value or guaranteed value)
- A valuation method that assigns a set value to each insured item.
- Value is determined prior to the issuance of policy
- Avoids the confusion of assessing appreciation or depreciation.
-Ex.: Antique jukebox appraised at: $25,000; Valued Policy for jukebox: $25,000; Policy will pay $25,000 exactly if jukebox is destroyed or damaged (minus deductible)
Stated Amount (aka Stated Value)
- Property value is stated by the insured when applying for insurance.
- When loss occurs, policy pays up to the stated amount or ACV, whichever is less.
Agreed value VS Stated value
Agreed value: Insured is paid the agreed amount, regardless of ACV.
Stated Value: lower premiums; good choice if insured can’t afford to insure an item for its full value.
Replacement Cost
Cost to replace and item at today’s market value.
Actual Cash Value
Replacement cost minus accumulated depreciation.
Annual Depreciation
Replacement cost divided by item’s useful life.
Accumulated depreciation
An item’s annual depreciation multiplied by its age.
Valued policy
Assigns a set value to each insured item.
Valuation
The process of estimating what an item is worth.
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.
Types:
- ) Actual total loss
- ) 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.
- Sometimes used when repairs would cost more than the policy limit.
- The insurer may keep the damaged property or deduct its salvage value from the claim.
Deductible
The amount the policyholder must pay out of pocket before the insurer will pay for losses.
- Lets the policyholder decide how much risk he is willing to take.
- Found on the declarations page of the policy.
- 3 types:
1. ) Fixed
2. ) Percentage
3. ) Franchise
Liability coverage
Never has a deductible, except for very rare exceptions.
Fixed deductible
A specific, set amount.
Ex.: 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. (Some policies combine fixe and percentage deductibles.)
Ex.: Karen insures her home 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.
Ex.: 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.
Ex.: Property value: $100,000; Coinsurance 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 penalty
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.
Loss settlement provision is an alternative to this that serves the same purpose.
Coinsurance penalty
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.
Loss settlement provision is an alternative to this that serves the same purpose.
Formula example: Had divided by Should= a percentage and then multiplied by Loss to equal total indemnification.
Coinsurance or deductible first?
Deductible first, to have a higher pay out for the insured (ambiguity always favors the insured); Unless stated otherwise!
Ex.: -Coinsurance requirement: $150,000 -Betty's policy limit: $120,000 -Deductible: $2,000 -Coinsurance formula: $120,000/$150,000=0.8 -So covered policy will pay 80% of a claim -Covered loss: $10,000 ----------------------------------- -Deductible first: $10,000-$2,000=$8,000 $8,000x0.8=$6,400 -Coinsurance first: $10,000x0.8=$8,000 $8,000-$2,000=6,000.
Deductible
Predetermined amount of money that a policyholder must pay before the insurance company will pay the remaining costs.
Fixed deductible
A set amount
Percentage deductible
A percentage of the property’s value
Franchise deductible
Insurer pays 100% of damages if losses exceed a certain set amount.
Coinsurance
Imposes a penalty if the homeowner does not insure home for at least 80% of its worth.
Coinsurance penalty equation
Had divided by Should multiplied by the partial loss
