What it means
Most commercial property policies contain a coinsurance clause, which requires the insured to carry cover worth at least a set percentage of the property's value, commonly 80% or 90%. If the cover falls short at the moment of a loss, the insurer pays only a proportion of the claim, and that proportional cut is known as the coinsurance penalty.
An agreed amount clause switches that penalty off. The insurer accepts a stated value up front, usually for the current policy year, and agrees to pay covered losses up to the policy limit without applying the coinsurance fraction.
The mechanism is a signed statement of values submitted before the policy incepts, listing each building, its replacement cost and the business income at risk. The insurer prices the policy from that schedule, so the clause is really a trade: certainty for the insured in return for honest, current figures from the insured.
The commercial reason this matters is that valuations drift. Construction costs, machinery prices and rebuild timelines all move, and a company insuring a warehouse at a figure agreed four years earlier can find itself 30% underinsured without having changed anything at all.
The main limitation is that an agreed amount clause typically expires with the policy term and must be renewed with fresh values each year. It also does not raise the policy limit, so a business that understates its values still recovers only up to the sum insured, however the penalty rules are written.
In practice
Real-world examples.
Example
A food manufacturer renewing its property programme submits an updated schedule showing that rebuild costs on its main plant have risen from $8,000,000 to $9,600,000. The insurer adds an agreed amount clause at the new figure, and the premium rises accordingly, but the coinsurance risk disappears for the year.
Example
A property manager insuring six small retail units cannot get accurate rebuild costs before renewal and so declines the agreed amount option. She instead buys cover comfortably above the 90% coinsurance threshold, accepting a slightly higher premium as the cost of not being sure.
Example
A brewery suffers a $600,000 business interruption loss and discovers its agreed amount clause covered the buildings but not the business income section of the policy. The building claim settles in full while the income claim is cut by the coinsurance fraction, which prompts a full review of the schedule.
Formula
Calculation
Coinsurance recovery = Loss x (Insurance carried / Insurance required), less the deductible
With an agreed amount clause, that fraction is suspended and the loss is paid in full up to the policy limit, less the deductible.
A distribution centre has a replacement value of $2,000,000 and the policy carries an 80% coinsurance requirement, so the insurance required is 0.80 x $2,000,000 = $1,600,000. The owner has actually bought $1,200,000 of cover. A fire causes $400,000 of damage and the deductible is $10,000.
Without an agreed amount clause, the recovery is $400,000 x ($1,200,000 / $1,600,000) = $400,000 x 0.75 = $300,000, less the $10,000 deductible, so the cheque is $290,000. The owner absorbs the other $110,000 of the loss.
With an agreed amount clause in place at a stated value of $1,600,000, the coinsurance test is not applied. The insurer pays the full $400,000 less the $10,000 deductible, a cheque of $390,000, which is $100,000 more than the penalised settlement.Case study
Seen in the real world.
Halberd Cold Storage is an illustrative, fictional business operating three refrigerated warehouses. Four years ago it insured the main site at a replacement value of $5,000,000 with an 80% coinsurance clause and simply rolled the same figure forward at each renewal without checking it.
Rebuild costs for refrigerated buildings rose sharply over that period, and the true replacement value at the time of a roof collapse was $7,500,000. Required insurance was 0.80 x $7,500,000 = $6,000,000 against the $5,000,000 actually carried, so the $1,200,000 loss was settled at $1,200,000 x ($5,000,000 / $6,000,000) = $1,000,000 before the deductible.
At the next renewal Halberd's broker insisted on a professional valuation and an agreed amount clause. The premium rose by about 14%, which the finance director accepted readily once he had seen $200,000 of a single claim disappear into a penalty that nobody had budgeted for.
Watch out
Common mistakes.
- Assuming an agreed amount clause also increases the policy limit, when it only removes the coinsurance penalty and never pays above the sum insured.
- Rolling forward last year's statement of values without checking rebuild costs, which quietly recreates the underinsurance the clause was meant to prevent.
- Believing the clause is permanent, when it usually applies for a single policy period and lapses unless fresh values are filed at renewal.
Questions
People also ask.
Is an agreed amount clause the same as agreed value cover?
They are closely related but not identical, because agreed value fixes the amount payable for a total loss while the agreed amount clause is specifically about switching off the coinsurance test.
Does the clause make insurance more expensive?
Usually a little, since the insurer is pricing on higher declared values and giving up a defence, but the extra premium is generally small compared with a coinsurance penalty on a large claim.
What happens if the declared values turn out to be wrong?
Insurers can void the clause or reduce a claim where the statement of values was materially inaccurate, so the protection depends on filing figures that are genuinely current.
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