Building Your Business Business Insurance Agreed Value Option to Avoid Coinsurance By Marianne Bonner Marianne Bonner Facebook Twitter Marianne Bonner, a certified CPCU and ARM, has covered small business insurance topics for The Balance since 2013. She worked in the insurance industry for 30 years as an analyst and underwriter among other roles and holds multiple professional designations. Along with The Balance, Marianne has written many articles for International Risk Management Institute's Risk Report. learn about our editorial policies Updated on September 19, 2022 Fact checked by J.R. Duren Fact checked by J.R. Duren J.R. is a terms editor at The Balance, a role in which he focuses on providing clear answers to common questions about personal finance and small business. J.R. has more than 10 years of experience reporting, writing, and editing. As an editor for The Balance, he has fact-checked, edited, and assigned hundreds of articles. learn about our editorial policies In This Article View All In This Article Understanding Agreed Value Options What's a Coinsurance Clause? Timing of the Coinsurance Penalty Limits Must Equal Agreed Value Business Income Coverage Frequently Asked Questions (FAQs) Photo: Hinterhaus Productions / Getty Images Some commercial property insurance policies include an optional coverage called "agreed value." This coverage suspends the coinsurance clause in your policy. That is, if you purchase agreed value coverage, your insurer will not consider coinsurance when calculating your payment for a loss (in general). However, it is important to note that agreed value coverage will protect you from a coinsurance penalty only if you have fulfilled certain requirements. Key Takeaways An agreed value option is a provision that suspends a coinsurance clause until a specific date.The property's value is agreed upon by the insured and insurer.If there is a claim on the property, the insurer agrees to pay up to the policy's full limit.Some companies may offer agreed value business income policies. Understanding the Agreed Value Option As its name suggests, agreed value is a property value that you and your insurer agree upon at the beginning of your policy period. To obtain coverage based on an agreed value, you must submit a statement of values to your insurer before your policy begins or renews. A statement of values is a list of your insured property (buildings and personal property) that includes the value of each item. Property values should be expressed in terms of replacement cost or actual cash value, whichever applies under your policy. Actual cash value is the cost to replace the equipment less the depreciation of the equipment calculated during its use. A statement of values is normally prepared on a standard Insurance Services Office (ISO) Form or on a similar form provided by your insurer. Ask your agent or broker for assistance if you need help completing the form. Note Once you have provided a statement of values to your insurer, the coinsurance clause in your policy will be suspended for the term of your policy. If a loss happens, your property will be assessed based on the agreed-upon value as long as you have insured your property for that amount. To continue agreed value coverage the following year, you typically need to submit a new statement of values before your current policy expires. If you fail to provide one, your agreed value coverage could lapse, and you may have to go back to making a coinsurance payment for a claim. Completing the ISO Form is time-consuming. Also, while the agreed value of any covered property does not depreciate during the term of your contract, the business property is depreciating. This changing value must be accounted for on the renewal of your agreed value contract. What's a Coinsurance Clause? The coinsurance clause appears in the conditions section of commercial property insurance policies. Its purpose is to encourage property owners to buy an adequate amount of insurance. If a loss occurs, the clause penalizes policyholders who have underinsured their property by forcing them to become "coinsurers." It means that policyholders must pay a portion of the loss themselves. If coinsurance applies to your property, a coinsurance percentage, such as 80% or 90%, should appear in your policy's property declaration pages. The percentage represents the amount of insurance you must maintain. This amount is expressed as a percentage of the value of your insured property. For example, say you just purchased a commercial property policy that includes a 90% coinsurance percentage. The policy covers your building and personal property, valued at $2 million and $500,000, respectively. To satisfy the coinsurance condition, you must buy insurance on your building for at least $1.8 million (90% of $2 million). Likewise, you must insure your personal property for at least $450,000 (90% of $500,000). Timing of the Coinsurance Penalty A primary problem with the coinsurance clause is the timing of the penalty. Your insurer evaluates your policy limits at the time loss a loss occurs. In the previous example, you satisfied the coinsurance requirements in your policy when you purchased the coverage. However, your property could increase in value during the policy period. If a loss occurs and you have failed to purchase additional coverage, your limits may fall short of the amount required by the coinsurance clause. If your limits are insufficient, you will be subject to a coinsurance penalty. There are a number of reasons why your property may increase in value. Perhaps you acquired a new property, such as furniture or computer equipment, which you didn't own when your policy was issued. Buildings may increase in value during the policy period due to inflation, rising construction costs, or a hot real estate market. You may not be aware that the value of your property has increased until a loss happens. Limits Must Equal Agreed Value To obtain protection from coinsurance under the agreed value clause, you must maintain limits equal to the agreed values. That is, if your statement of values indicates that the cost to replace your building is $2 million, you must maintain a building limit of at least $2 million. If a loss occurs and you have failed to maintain the limits shown in your statement of values, you may be stuck paying a portion of the loss. Under the agreed value clause, the most your insurer will pay for a loss to damaged property is the proportion that the limit for that property bears to the agreed value of that property shown in the statement of values. For example, suppose that you own a building that you have insured on a replacement cost basis. You have insured your building at a limit of $1.5 million. However, your statement of values indicates that the replacement cost of your building is $2 million. A severe hailstorm causes $100,000 damage to the roof of your building. Your insurer will compare the agreed value of your building to the limit on your policy. Because you've only insured 75% of your property's agreed value, the insurer will only pay 75% of the claim, or $75,000 before deductible. You would have to pay the remaining $25,000 out of pocket if the coinsurance penalty is 100%. Business Income Coverage An option for agreed value coverage is also available under business income insurance. When this coverage is purchased, the coinsurance clause found in the business income form does not apply. If you wish to initiate agreed value coverage, you must notify your insurer. You must also submit a business income worksheet outlining your projected revenues and operating expenses for each of the following: The twelve-month period prior to the date on the worksheetThe twelve-month period that follows the inception of your agreed value coverage (typically the inception date of your policy) To continue the agreed value option each year, you must submit a new business income worksheet before your policy renews. If you have selected this option under business income insurance, the agreed value should be listed in the declarations section of your property policy. This value should equal the coinsurance percentage shown in the declarations multiplied by your estimated net income and expenses. For example, suppose that your business income coverage is subject to 50% coinsurance. Your estimated net income and expenses for the next 12 months is $1 million. Your business income limit must be at least $500,000 (50% of $1 million). If you sustain a $100,000 business income loss and your business income limit is at least $500,000, no coinsurance will apply. Your $100,000 loss should be paid in full (if no deductible applies). In the previous example, suppose your business income limit is only $400,000. You have failed to purchase the required limit of insurance. The most your insurer will pay is $80,000, calculated as follows: $400,000 limit / $500,000 agreed value = 80%$100,000 loss x 80% = $80,000 Frequently Asked Questions (FAQs) Is agreed value better than actual cash value? Generally speaking, agreed value is a dollar amount you and your insurer agree on regarding the value of your property. Actual cash value is a type of coverage in which the insurer agrees to pay the replacement cost of an item minus depreciation. Is agreed value the same as no coninsurance? Generally speaking, an agreed-value option allows you to insure your property and waive your coinsurance. Another way to say it is that no coinsurance is one of several effects of agreed value coverage. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Landes Blosch. "Agreed Amount Endorsement—What Is It?" Leland West. "What Is Agreed Value Insurance?" Safe Point Insurance. "Statement of Values," Pages 1-2. International Risk Management Institute. "Agreed Value Coverage Option or Provision." Safe Point Insurance. "Statement of Values," Pages 1, 3. The Hartford. "How To Calculate Business Income." Adjusting Today. "Agreed Value Clause: Friend? Or Sometimes Foe?" Pages 2-4. The Hartford. "What Is Business Income Coverage?"