Agreed Amount Clause

The agreed amount clause is a property insurance provision through which the insurer agrees to waive the coinsurance requirement. Insurers will require a statement of property values, signed by the policyholder, as a condition for activating or including an agreed value provision in a policy. The arrangement is available for commercial and other properties.

Other names include the agreed value optional endorsement and waiver of coinsurance clause.

The agreed amount clause requires a signed statement of values or actual cash value, which details the value of the insured property. Actual cash value is the amount equal to the replacement cost minus depreciation at the time of the loss. It is the tangible value for which the property could sell, which is always less than what it would cost to replace it. Calculation of actual cash value is by subtracting depreciation costs from replacement costs, with depreciation determined by establishing an expected lifetime and determining the remaining percentage of life.

The value listed on the statement will become the basis from which policy coverage is determined. The policyholder agrees on this amount beforehand and cannot contest the amount of coverage at a later date. Once the statement is approved, the insurer will suspend the requirement of the coinsurance clause in the policy for the one-year term of the policy.

Many types of insurance have a coinsurance clause, including healthcare, property, and flood insurance, but its use is not the same for all policy types. 

In property insurance, coinsurance applies to the level of coverage that an insurance company will underwrite. Usually, this is 80%, but some insurers may require 90- or 100-percent coverage depending on the value of the building, its location, and the chances that a loss will occur during the policy period. Also, people will tend to underinsure their properties or cover them only to the amount they feel most comfortable paying the premium. For this reason, insurance companies will require that a policy covers a stated percentage of the value of the structure.

Generally, insurance companies tend to waive coinsurance only in the event of reasonably small claims. In some cases, policies may include a waiver even in the event of a total loss. However, policies that defer the coinsurance clause will come at a higher premium. 

Because co-insurance policies require the payment of deductibles before the insurer will bear any cost, policyholders absorb more costs up front. Using the agreed amount clause, if a loss should happen, the insurer will assess the property based on the agreed-upon value. These clauses are most valuable in the case of a total property loss. Also, before the policy expiration date, the policyholder must submit an updated statement of value if they wish to renew the agreed amount clause.

It's important to note that the lack of any coinsurance for this type of policy means if coverage is insufficient to cover a loss, the policyholder will need to satisfy the difference, themselves. This situation can happen if a policyholder undervalues the property in the statement of value.

As an example, suppose that you own a building that you have insured on a replacement cost basis at a limit of $1 million, and your policy includes a $1,000 deductible. However, your statement of values indicates that the actual replacement cost of your building is $2 million.

If a windstorm causes $100,000 damage to the facade, your insurer will compare the agreed value of your building, the $2 million, and your policy limit. However, because you underinsured your building, your insurer will not cover your complete loss. Instead, your insurer will cover 75% of your losses, less $1,000, or $74,000.