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Loss Cost Settlement Methods

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Reviewed byJoel Ohman
Founder, CFP®

UPDATED: Mar 13, 2020

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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 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.

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

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 value, replacement cost, and agreed value.

Replacement cost and actual cash value are more common than agreed value. 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.

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.

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.

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.

However, insurers don’t typically use stated value when insuring a personal auto.

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.

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.

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.

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