What Is Valued Policy Law?
Valued policy law (VPL) is a legal statute that mandates insurance companies to compensate the full value of a policy to the insured in cases of total loss. Unlike other policies that consider the actual cash value of the property at the time of loss, VPL requires insurance companies to pay the declared policy value in full.
A valued policy stands in contrast to an unvalued, or open, insurance policy, where the value of the property must be established after a loss by producing invoices, estimates, claims adjustments, or other relevant evidence.
Key Takeaways
- Complete Coverage: Valued policy laws require insurers to cover the full declared value of a property if it suffers a total loss.
- Assessment Methods: Under VPL, the repayment value can be calculated based on either actual cash value or replacement cost.
- State-Specific Laws: In the U.S., only certain states enforce valued policy laws, while others require proof of loss.
Delving Deeper: Understanding Valued Policy Law
A total loss occurs when an insured property is destroyed or so extensively damaged that it cannot be recovered or repaired. In such scenarios, a total loss triggers the maximum settlement outlined in the insurance policy.
Insurance policies typically utilize one of two methods for loss valuation: actual cash value or replacement cost.
- Actual Cash Value (ACV): ACV is commonly used to determine the necessary insurance amount, the loss amount to be paid, and any applicable coinsurance. It is defined as the replacement cost at the time of loss, minus depreciation. The broad evidence rule further refines this definition by including all relevant evidence an expert would use to establish property value, such as replacement cost less depreciation and fair market value.
- Replacement Cost: This method entails the insurer paying the full cost required to repair or replace the property, after deducting any applicable deductible and excluding any depreciation.
Valued policy laws stipulate that the amount stated in the policy declarations must be the dollar amount paid to the insured at the time of loss. If an insured item’s value at the time of loss is less than the insured amount, the insurer cannot contest full payment. Additionally, most valued policy states consider any policy provision that conflicts with the valued policy law as void.
Not all U.S. states enforce these laws. States with valued policy laws include Arkansas, California, Florida, Georgia, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Ohio, South Carolina, South Dakota, Tennessee, Texas, West Virginia, and Wisconsin.
Historical Milestone: 1874
Wisconsin was the pioneer in passing a Valued Policy Law in 1874.
Navigating the Controversies of Valued Policy Law
Hurricane Katrina prompted the insurance industry in Louisiana to closely examine Valued Policy Law. Despite the law, few policyholders received the full coverage amount due to varied interpretations. Insurers argued that the law did not apply when losses resulted from non-covered perils like floods or mixed causation involving covered perils (wind) and non-covered perils (flood). Additionally, compensation from the National Federal Flood Insurance Program and FEMA grants sometimes offset total losses, further complicating settlements.
Understanding valued policy law and its nuances is crucial for both policyholders and insurers to ensure fair and adequate compensation in case of total loss scenarios.
Related Terms: Total Loss, Actual Cash Value, Replacement Cost, Insurance Policy.
References
- Yale Law School. “Is There Any Value? Reevaluating Homeowners Insurance Valued Policy Laws”, Pages 2-3.
- South Carolina Department of Insurance. “Understanding the Claim Payout Process”.
- Progressive. “Replacement Cost vs. Actual Cash Value”.
- Ohio Insurance Agents. “What You Need to Know About Valued Policy States”.
- Yale Law School. “Is There Any Value? Reevaluating Homeowners Insurance Valued Policy Laws”, Page 5.
- Loyola University New Orleans. “Katrina’s Impact on Litigation of Insurance Claims Under Louisiana”.
