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Midwest Marine Surveyors Chippewa Falls, Wisconsin, USA Serving Minnesota and Wisconsin. St. Croix and Upper Mississippi Rivers. Gary Shorrel, SAMS® AMS® Principal Marine Surveyor |
| Actual Cash Value vs. Agreed Value When purchasing marine insurance it is very important to know what type of policy you are getting - hence the old adage, "read the fine print!!" If ever you have to make a loss claim (a "master's protest"), you should realize that there are different methods by which your marine insurance company may calculate the amount it will pay you for the loss. Unfortunately for some, it is not until they are faced with making a claim that they are shocked to discover how this difference in policy type can affect them. The following are examples of the differences in policy types: Policies that are based on the "Agreed Value" (i.e. replacement cost) of damaged or stolen property are usually the most favorable types from the insured's point of view, because these types of policies compensate you for the actual cost of replacing property. If your vessel is stolen, damaged, or destroyed, an "agreed value" policy will most likely reimburse you the full cost of replacing it with a new vessel of the same type, or fully repairing the vessel if it is repairable. In most cases, the insurer will not take into account the normal wear and tear that the vessel or property has seen throughout the coverage period. In contrast, an actual cash value (ACV) policy, which is also known in some circles as a "market value" policy, is the standard that insurance companies prefer when reimbursing policyholders for their losses. Actual cash value is equal to the replacement cost minus any depreciation (Actual Cash Value = replacement cost less depreciation). It represents the dollar amount you could expect to receive for your vessel if you were to sell it in the marketplace. The insurance company determines the depreciation based on a combination of objective criteria (taking into account the type and age of the vessel) and subjective assessment (a Surveyor's report based on the observations of the vessel, including photographs). In the case of the stolen vessel, the insurance company would deduct from its replacement cost an amount for all the wear and tear it endured prior to the time it was stolen. What Does "Agreed Value" Mean? Not all marine policies are exactly alike - they fairly relate in most respects, but each underwriting company may have their own nuances. The term "Agreed Value" is defined or explained in each policy, and if it is not you should ask your agent or underwriter what their exact definition of "agreed value" states. Simply, it means the cost to replace the vessel (or property) on the same premise with other comparable vessels and quality that have the same intended purpose. This applies unless the limit of insurance or the cost actually spent to repair or replace the damaged vessel or property is less. In any case, you should refer to your policy for the exact definition and explanation of "agreed value", or replacement cost. What is "Actual Cash Value"? The term "actual cash value" is not as easily defined. Some courts have interpreted the term to mean "fair market value," which is the amount a buyer would pay a seller for a vessel or property if neither were under undue time constraints. Most courts, however, have upheld the insurance industry's traditional definition: the cost to replace with new property of like kind and quality, less depreciation. Courts have varied in their rulings as to whether or not depreciation includes obsolescence (loss of usefulness as a result of outmoded design, construction, etc.). So What's the Difference? The only difference between an agreed value policy and an actual cash value policy is a deduction for depreciation, which means you will probably have to supplement money from your own pocket to complete repairs or fully replace damaged, stolen, or ruined vessel. However, both are based on the cost today to replace the damaged vessel with new. Although the premiums for agreed value policies are more costly than actual cash value policies the benefits of an agreed value policy usually exceed the extra cost. |
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