The valued policy law (VPL) is a law that facilitates prompt payment of claims when an insured event occurs. The law requires that the insurance company pays the full value of a policy to the policyholder when an insured event results in a total loss. Usually, it reimburses the policyholder for the full value of loss rather than the actual cash value of the subject-matter insured at the time of loss.
The full value does not consider factors as depreciation or re-assessment at the time of loss. The VPL’s purpose is to protect valued policyholders from receiving a lower reimbursement in case they suffer a total loss. The valued policy law was first enacted in Wisconsin in 1874, while Florida passed the law in 1899. In total, the law is active in about 20 US states.
Valued policy law is an insurance law that requires insurers to pay the policyholder the full value of the policy when the covered peril causes a total loss.
The settlement amount under the value policy law does not consider the replacement cost or actual value of the property at the time of loss.
If the total loss is caused by a covered peril and a non-covered peril, the valued policy law does not apply.
How the Valued Policy Law Works
The purpose of the valued policy law is to protect the insured when the subject-matter insured is wholly damaged in a covered peril. The law requires that the dollar amount paid to the policyholder should be the dollar amount stated in the policy declaration. The insurer cannot pay less than the full value of the policy, even if the property is valued at a lower value at the time the peril occurred. The protection eliminates the need for the policyholder to provide evidence of the insured property’s actual cash value or replacement cost.
For example, assume that an insurer previously agreed to insure a golf resort for $10 million. If the building is destroyed in a storm and the insured suffers a total loss, the insurer is obligated to pay the full value of the coverage, i.e. $10 million, even if the actual value of the building was less than the face value of the coverage at the time of loss.
Therefore, insurers must determine the value of the insured property at the commencement of the policy, since they cannot dispute the value after the occurrence of the covered peril. The insurer must pay the full value of the policy even if the property is over-insured at the time of loss.
Perils and Properties Covered under Valued Policy Laws
The valued policy law is applied when a covered peril causes total loss to an insured building, home, or other structure. By actual total loss, it means that the damage caused by the covered peril was so extensive that the structure cannot be repaired or recovered for further use. If the insurer cannot link fraud or criminal activity to the total loss, it is obligated to make the maximum possible settlement according to the terms of policy declaration.
Although most valued policy laws are limited to fire damage only, other policies may provide coverage for other perils, such as a tornado, wind, lightning, and/or an explosion. The policyholder must prove the actual damages with the insurer to recover the loss incurred.
If the total loss is caused by two or more perils, where one peril is covered and the other peril is not covered, the valued policy law does not apply. For example, some states cover losses caused by wind, but not flooding. If a building is destroyed by a combination of wind and floods, the amount of reimbursement that the insurer will make will depend on the state and the amount of loss that can be directly attributed to each peril.
For example, if a homeowner’s taken out a valued policy worth $100,000, and suffers a total loss due to a combination of wind and floods, the insurer will determine the amount of loss attributable to each peril. If the loss caused by wind (covered by the policy) is $80,000, and the loss caused by floodwater (non-covered peril) is $20,000, the valued policy law becomes inapplicable and the policyholder cannot recover the entire $100,000 full value of the policy. Nevertheless, the policyholder can seek settlement for damages caused by the covered peril, i.e. $80,000.
Valued policy laws differ among U.S. states. The following are examples of VPL in two key states:
The valued policy law in California covers buildings, and it applies to all perils covered by the policy. The insurer needs to inspect the policyholder’s building to assign a fixed value at the inception of the policy. If the property is rendered a total loss when the covered peril occurs, the insurer must pay the fixed value stated in the policy document.
The valued policy laws in Arkansas are exclusive to real properties, and they cover total losses caused by fire and natural disasters. The classification excludes floods and earthquakes. If any real property is wholly destroyed by fire or natural disasters (excluding floods and earthquakes), the amount of settlement shall be the full value of the property determined at the inception of the policy.
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