Valued Policy Law (VPL)

Valued policy law (VPL) is a statute that requires insurance companies to pay the full value of a policy to the insured in the event of a total loss. Valued policy law does not consider the actual cash value of the insured property at the time of the loss; instead, the law mandates total payment.

Not all states within the United States have these laws. States that do have 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. Wisconsin was the first state to pass a Valued Policy Law in 1874.

Insurance policies generally use one of two methods to determine the value of a loss: actual cash value or replacement cost.

• Actual cash value is the most common standard for determining the amount of insurance needed, the amount of loss to be paid and the amount upon which any coinsurance or similar requirement will be based. Actual cash value is defined as replacement cost at the time of loss, less depreciation. However, this definition is being rewritten through case law and state legislation by the broad evidence rule, which states that the determination of the actual cash value of a loss should include all relevant evidence an expert would use to set the value of the property, including replacement cost less depreciation and fair market value.
• Replacement cost means that the company will pay the cost to repair or replace, after application of the deductible and without any depreciation.

In general, valued policy laws require that the amount stated in policy declarations shall be dollar amount paid to the insured at the time of loss. If the value of an insured item at time of loss is less than the amount of insurance, the insurer has no recourse to contest payment in full. Moreover, in most valued policy states, any policy provision inconsistent with the valued policy law is considered void.

Hurricane Katrina forced the insurance industry in Louisiana to examine the Valued Policy Law; few policyholders were paid their entire coverage amount because of interpretations of the valued policy law. Some insurers claim that the law does not apply because certain losses were a result of a non-covered peril (flood), that certain losses were a result of "mixed causation" – a combination of a covered peril (wind) and a non-covered peril (flood) – and that the total loss was offset by other sources including the National Federal Flood Insurance Program and FEMA grants.