What it means
Most insurance pays the actual loss, which has to be proved after the event. A valued marine policy works differently, because the value is fixed when the policy is written and written into the policy document.
Marine insurance is a natural home for this approach. A vessel or cargo may be lost far from any market, and establishing what it was worth at that place and moment can be difficult, slow and expensive to argue about.
The agreed value is not necessarily the market value, though it is normally set close to it. It may include the cost of the cargo, freight, insurance cost and an allowance for expected profit, so that the owner is made whole in a way an ordinary policy might not allow.
For a total loss, the insurer pays the full agreed value. For a partial loss, the payment is generally the agreed value multiplied by the percentage of damage, so a ship damaged to the extent of one fifth of its value yields one fifth of the agreed figure.
The main contrast is with an unvalued policy, where the value is established only after a loss and the payout cannot exceed the actual loss. A valued policy gives the owner certainty but gives the insurer an incentive to examine the agreed value carefully at the start.
Agreed values are not beyond challenge. If a value was deliberately inflated, or the owner hid material facts, the insurer can dispute it, and the courts in many places will look at fraud even in a policy that calls itself valued.
In practice
Real-world examples.
Example
A shipping company insures its freighter for an agreed value of $12 million. The vessel is lost in a storm at a time when second-hand ship prices have dipped to $10 million. The insurer pays the full $12 million because that was the agreed figure.
Example
A wine merchant ships a container of rare vintages with an agreed value of $300,000 that includes expected profit. Part of the container is crushed during loading, and the surveyor puts the damage at 30%. The payout is 300,000 x 0.30 = $90,000.
Example
A fishing cooperative insures its boat for an agreed $800,000. Because the value is fixed, the cooperative can show its bank a precise insured amount when it applies for a loan against the vessel. The bank accepts the policy as security.
Formula
Calculation
Payout on total loss = Agreed value
Payout on partial loss = Agreed value x Percentage of damage
An importer insures a consignment of machinery under a valued policy with an agreed value of $500,000. If the ship sinks and the cargo is lost, the insurer pays the full $500,000, even if the machinery's market price on the day was only $450,000. If instead the cargo is damaged by seawater and a surveyor assesses the damage at 20% of its value, the payout is 500,000 x 0.20 = $100,000.Case study
Seen in the real world.
This illustrative story involves a fictional exporter, Delmar Textiles, which ships fabric to a retailer overseas. It insured the shipment under an unvalued policy, and when the container was lost the insurer disputed the amount, arguing that the fabric's market value was lower than the invoice.
The dispute took eight months to settle, and in that time Delmar had to fund the replacement stock out of its overdraft. The final settlement was about $20,000 below the sum the company had expected.
On the next shipment, the fictional company agreed a value of $250,000 in advance under a valued policy, including its expected profit. The premium was slightly higher, but the company now knew exactly what it would recover, and its bank was willing to finance the shipment on better terms.
Watch out
Common mistakes.
- Assuming the agreed value will always match the market value. The value is fixed at the start, so the market can move above or below it before a loss.
- Believing the agreed value is beyond any challenge. A deliberately inflated value or concealed information can still lead to a dispute or voided cover.
- Thinking a valued policy pays full value for any damage. For partial losses the payment is usually a proportion of the agreed value, not the whole amount.
Questions
People also ask.
What is the difference between a valued and an unvalued policy?
A valued policy fixes the worth in advance, while an unvalued policy pays the proven actual loss up to the sum insured.
Why would an insurer agree to a valued policy?
It gives the insurer clarity too, avoiding costly valuation disputes, and the premium is set with the agreed value in mind.
Does a valued policy apply to land-based property?
Marine insurance traditionally uses it, but some jurisdictions also have rules about agreed values in property cover, as with valued policy laws.
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