Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001 and has an undergraduate degree from Manhattan College in ...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Joel...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Sep 30, 2021

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When you suffer a property loss, whether related to your vehicle or home, you expect to be indemnified, or “made whole again’ by your insurance company. This isn’t a one size fits all solution.

This is where some policies can get tricky. If you skimped on coverage to save money, whether knowingly or not, you may not end up where you expected to be in the event of a loss. Sometimes, it’s not even the borrower who cut corners. Your insurance company might use different valuation methods to get your business by undercutting competitors. After all, they can charge less if their policy only covers $300,000 instead of $500,000. If your house costs $500,000 to rebuild after a total loss, you could find yourself in a pinch. This is even more true after a natural disaster or other time of loss that involves multiple homeowners. The price of materials can go up dramatically, and not all insurance policies account for that.

Your sense of satisfaction may depend on what type of loss cost settlement your policy utilizes.

What are the three types of loss cost settlement options?

There are three loss cost settlement options an insurer typically offers in their policy.

They include actual cash valuereplacement cost, and agreed value. Each of these options has its benefits and downsides depending on the insured. In some cases, homes are harder to value in traditional terms. So agreed value makes sense as long as you’re willing to pay for it.

Replacement cost and actual cash value are more common than agreed value. Replacement cost generally sets an average cost per square foot based on the condition and style of your home. It’s the most common approach to meet many mortgage lender requirements. In car insurance, your insurance policy might cost more, but it’s often worth it when considering real world market conditions. There is no magic way to determine which is best for you, but the following information may help you decide which to ask for on your next policy.

Actual cash value, or ACV, is typically cheaper than replacement cost, which is why many people end up with his type of loss cost settlement option. The idea is to give you enough to replace your property in the state it’s in now. It’s partly up to the adjuster to determine how much that is. But if you’re relying on your settlement, it may be difficult to find a car within that price range.

ACV is defined as “fair market value” or the cost for a new car minus depreciation.

If you car was $20,000 brand new, and you totaled it after owning it for a few years, you would not get the full $20,000, but rather a lower amount, perhaps only $10,000 or even less depending on how old it is.

This is where you may feel slighted and have to argue the value with your insurer.

Replacement cost coverage on the other hand, is better, more expensive, and easier to determine, as it will pay whatever is necessary to replace your damaged property with property of a like kind and condition, up to the policy limits. Some insurers may even supplement this with better car replacement. Depending on the market, this may supplement more expensive market trends.

If you provide a “stated value” for your vehicle when purchasing your policy, that is the maximum amount you can be reimbursed in the event of a total loss. This is most common for classic and other specialty cars. With all the custom parts and restoration required, a traditional valuation method cannot capture the true value of many classic cars. Of course, this also means you’ll have fewer companies willing to offer you the insurance you need. If you choose a popular insurer like GEICO or Progressive, you may not get what you expect.

It is possible to get into trouble here if you state the value of your vehicle lower than what it’s actually worth in order to snag a lower insurance premium. You would not get more coverage than you paid for in the event of an accident. Of course, if you request a ridiculous value that far exceeds the value of your car, you’ll pay higher premiums. But there’s no guarantee your insurance company will actually pay in a time of loss.

The agreed value loss cost settlement option is typically reserved for one-of-a-kind, unique items, or items of high worth where the value cannot be easily assessed. It can be used for more than just cars.

For example, if you are insuring a rare coin or an expensive painting, you and the insurance company will have to agree on what the item is worth at the time the policy is written.

This is what you will be paid if it is destroyed. Often an independent appraisal will satisfy this requirement. You can get multiple appraisals if you don’t agree with the valuation of the first, but your insurer may choose between the two in choosing a settlement method and amount.

Contact your insurer of independent agent to review your policy if you’re not sure which type of loss cost settlement you currently have or if you want to change your policy to reflect a different type.