Filed Under:Risk Management, Loss Control

Not all fire insurance policies are the same: Valued vs. non-valued

Tammy Sherrod views the remains of her home in the Roaring Fork neighborhood of Gatlinburg, Tenn., Friday, Dec. 2, 2016. Residents were getting their first look at what remains of their homes and businesses in Gatlinburg, after a wildfire tore through the resort community on Monday, Nov. 28. (AP Photo/Adam Beam)
Tammy Sherrod views the remains of her home in the Roaring Fork neighborhood of Gatlinburg, Tenn., Friday, Dec. 2, 2016. Residents were getting their first look at what remains of their homes and businesses in Gatlinburg, after a wildfire tore through the resort community on Monday, Nov. 28. (AP Photo/Adam Beam)

The wildfires that engulfed parts of Gatlinburg and Sevier County, Tenn., in late November have left behind an estimated 1,700 damaged or destroyed structures.

Because Tennessee is a valued policy state, the adjusting for some of these buildings may be different than in a non-valued policy state.

Property policies generally use one of two methods for determining the value of a loss: actual cash value or replacement cost.

Actual cash value


Actual cash value is usually the standard for determining the amount of insurance needed, the amount of loss to be paid, and the amount upon which any coinsurance or similar requirement will be based.

In general, the principle that actual cash value means replacement cost of the property at the time of loss less depreciation, long accepted in insurance circles, is being replaced through case law and state legislation by the broad evidence rule. This rule means that the determination of the actual cash value of any property should include all relevant evidence an expert would use to set the value of the property, including replacement cost less depreciation and fair market value.

Replacement cost


Replacement cost means that the company will pay the cost to repair or replace, after application of the deductible and without deduction for depreciation.

In general, valued policy laws require that in case of total loss to an insured building by a peril specified in the law, the amount stated in the policy declarations is considered the value of the structure at the time of loss and is payable in full. If the value of the property at time of loss is less than the amount of insurance, the insurer may not argue that payment should be limited to the lower amount, the actual cash value. Moreover, in most valued policy states, any policy provision inconsistent with the valued policy law is considered void.

Avoid argument building was overinsured


Valued policy laws differ in their particulars among the various states, but the purpose for which they were enacted is similar — primarily to protect insureds from being subjected after loss to argument that the building was overinsured, in an attempt by the insurer to pay less than the face amount for which the insured paid premium.

Related: Oakland warehouse fire kills dozens of party-goers

Tennessee law requires that the insured building be inspected within 90 days of the fire insurance being written to determine the fair value of the property. If no inspection is made and the property is a total loss, the policy becomes an open policy and the value of the building is determined at the time of loss.

In the event of total destruction by fire, the company is liable for the actual value of the property. If the insured has paid premiums on an amount that exceeds the value of the property, the excess premiums are reimbursed with 6 percent interest.

Smokes rises out of the remains of a burned-out business

Smokes rises out of the remains of a burned-out business Wednesday, Nov. 30, 2016, in Gatlinburg, Tenn., after a wildfire swept through the area. (AP Photo/Mark Humphrey)

It's important to remember that the valued policy law does not apply unless the structure is a total loss. What that means can be a fact for a court decide. One Tennessee case, Hollingsworth v. Safeco Ins. Companies, 782 S.W.2d 477 (Tenn. App. 1988), noted that "the total destruction of a building within the meaning of an insurance policy means its complete destruction as a building, but not necessarily the absolute extinction of all its materials, or even that no part of it can be left standing."

The court also stated that the Tennessee Supreme Court adopted an "identity" test to determine if a building is a total loss. Under the test, a building would be considered a total loss if the building loses it specific character and identity as a building.

If buildings or structures are deemed to be total losses due to the recent wildfires, insureds should receive policy limits.

State summary of valued policy laws


Following is a summary of the provisions of the valued policy laws of those states that currently have such laws.

The section number of the state statute (usually the insurance code) containing the valued policy provisions is referenced directly next to the state name. Each state’s treatment includes the kind of property specified in the law as subject to the valued policy law; the perils to which the valued policy law applies; and other comments concerning special or noteworthy provisions or interpretations of that state’s valued policy law.

Arkansas (Ark. Code Ann. §23-88-101)


Property subject to valued policy law: All real property except detached or appurtenant structures, total loss by fire or a natural disaster except flood or earthquake if it is caused by a criminal act of insured or someone acting on insured's behalf, builders risk insurance policy, or if insured under a blanket insurance policy.

Perils subject to valued policy law: Fire and natural disaster, but not flood or earthquake.

Other comments/special provisions: In case of duplicate coverage, policies pay pro rata. Underwriters at Lloyd's, London v. Pike, 812 F.Supp. 146 (W.D. Ark. 1993).

Related: 4 holiday season fire prevention tips

California (2052, 53, 54, 55, 56, 58, 75 — buildings) (381.2 — scheduled personal property)


Property subject to valued policy law: Buildings or structures.

Perils subject to valued policy law: All perils covered by the policy.

Other comments/special provisions: Insured may elect to have valued policy and pay the cost of the insurer's examination of the property.

Property subject to valued policy law: Scheduled personal property.

Perils subject to valued policy law: All perils covered by the policy.

Other comments/special provisions: Applies to any item separately listed and described with a separate amount of insurance (except business property, motor vehicles, and property insured by two or more policies) unless policy and application show alternative valuation method in prominent type.

Florida (627.702)


Property subject to valued policy law: Any building, structure, mobile home, or manufactured building.

Perils subject to valued policy law: All perils covered by the policy.

Other comments/special provisions: Insured may waive valued coverage on mobile home by signing disclosure form accepting ACV or replacement coverage instead. Law applies to multiple policies only if disclosed to insurer; does not apply to completed value builders risk, blanket insurance, or insurance on appurtenant structures with no dollar amount specifically applicable. Insurer may replace property in lieu of payment (except on valued policies on mobile homes) but must return premium on the insurance in excess of the amount paid to replace.

Fire officials walk in front of the scene of a house fire

Fire officials walk in front of the scene of a house fire where an Atlanta fire spokesman says six people were killed Monday, March 7, 2016, in Atlanta. (AP Photo/David Goldman)

Georgia (33-32-5)


Property subject to valued policy law: One or two family residential building or structure.

Perils subject to valued policy law: Fire.

Other comments/special provisions: Law applies only to "natural persons" insuring the property; does not apply to completed value builders risk, to blanket insurance, or to loss within first thirty days of coverage. On total loss, depreciation between date of coverage and date of loss may be deducted from amount of insurance. Insurer may repair or replace property in lieu of payment.

Kansas (40-905)


Property subject to valued policy law: Improvements upon real property.

Perils subject to valued policy law: Fire, tornado, windstorm, or lightning.

Other comments/special provisions: Not applicable to fire loss (excluding fire caused by lightning) on new policies until coverage, or 25 percent more increase in coverage on existing policies, is in effect at least sixty days (for total fire loss before then, insurer must refund excess premium). Also not applicable to builders risks.

Louisiana (22:1318)


Property subject to valued policy law: Inanimate property, immovable.

Perils subject to valued policy law: Fire.

Other comments/special provisions: Liability of insurer shall not exceed insurable interest of insured in the property. Law does not apply to blanket insurance or builders risk. Applies unless the policy and any application stipulate a different method for computing loss in equal size type.

(22:1270)

Property subject to valued policy law: Personal property.

Perils subject to valued policy law: All perils covered by the policy.

Other comments/special provisions: Applies unless the policy and any application for the policy stipulate a different method for computing loss in a type of prominent size. Does not apply to land vehicles or property used primarily for business purposes.

Related: Who get the insurance payout after a building is destroyed by fire?

Minnesota (65A.08)


Property subject to valued policy law: All property.

Perils subject to valued policy law: All perils insured by the policy.

Other comments/special provisions: Coverage may be limited to repair or replacement value for farm buildings or other structures. If property is insured under the Minnesota FAIR plan, if the plan takes the position that the value was less than that set forth in the policy, the plan must prove with clear and convincing evidence that the value was less than that of the policy. At such time the difference in premium will be returned to the insured.

Mississippi (83-13-5)


Property subject to valued policy law: Buildings and structures.

Perils subject to valued policy law: Fire.

Other comments/special provisions: Applies to partial loss when a law or ordinance prevents rebuilding.

Only applies to fire insurance. In the even the building is totally destroyed by the fire, the insurer will pay the amount stated in the policy. The insurer is not allowed to attach a three-quarter clause to fire insurance policy.

Missouri (379.140; 145)


Property subject to valued policy law: All property. Stahlberg v. Travelers Indem. Co., 568 S.W.2d 79 (Mo. Ct. App. 1978).

Perils subject to valued policy law: Fire.

Other comments/special provisions: Depreciation in value from effective date of coverage to date of loss may be deducted from face amount; burden to prove deduction lies with insurer.

In the event of a total loss, the insurer must pay the total amount of the policy less the depreciation of the property between the time of the issuance of the policy and the loss. In a partial loss, the insurer must pay the comparable percentage of the total value as the damaged part bears to the whole property.

Unidentified persons walk through what is left of a house in Nehawka, Neb., Friday, Oct. 21, 2016, which was destroyed by a fire

Unidentified persons walk through what is left of a house in Nehawka, Neb., Friday, Oct. 21, 2016, which was destroyed by a fire. A Cass County sheriff's official has confirmed that all six members of a rural southeast Nebraska family were killed in the house fire. (AP Photo/Nati Harnik)

Montana (33-24-102, 33-24-103)


Property subject to valued policy law: Improvements upon real property.

Perils subject to valued policy law: All perils.

Other comments/special provisions: Also applies to specifically listed items of personal property (except motor vehicles).

If the loss happens within 90 days of an increase in policy limits of 25%, the loss payable is either the full value of the policy or the actual cash value or the replacement cost, whichever is lower. It does not apply to appurtenant or separate structures, which must be settled for actual replacement cost or actual cash value.

Nebraska (44-501.02)


Property subject to valued policy law: Real property.

Perils subject to valued policy law: Fire, tornado, windstorm, lightning, or explosion.

New Hampshire (407:11)


Property subject to valued policy law: Buildings.

Perils subject to valued policy law: Fire and lightning.

Other comments/special provisions: Not applicable to blanket insurance.

North Dakota (26.1-39-05)


Property subject to valued policy law: Real property. Does not include appurtenant or separate structures unless specifically described and a value is set on the structure.

Perils subject to valued policy law: Any covered cause of loss.

Other comments/special provisions: The law does not apply if the loss occurs in the first ninety days of a new policy or within ninety days of an increase in insurance of 25 percent or more or to builders risk policies.

Ohio (3929.25)


Property subject to valued policy law: Any building or structure.

Perils subject to valued policy law: Fire and lightning.

Other comments/special provisions: Law requires insurer's agent to inspect, provide full description, and fix its insurable value. Law does not apply if risk increased without consent of insurer, to replacement cost insurance, or if there is additional insurance prohibited by policy. Cellar and foundation walls are not considered part of the building in settling claims.

Related: 10 most costly wildland fires in the U.S.

Investigators sift through debris in the aftermath of a house fire

Investigators sift through debris in the aftermath of a house fire on Saturday, March 24, 2012, in Charleston, W.Va. A fire tore through the two-story home that had no functioning smoke detectors, killing eight family members, including six children. (AP Photo/Craig Cunningham)

South Carolina (38-75-20)


Property subject to valued policy law: All property except chattels or personal property.

Perils subject to valued policy law: Fire.

Other comments/special provisions: Insurer and insured must fix value at or before time insurance is written. If total amount of two or more policies exceeds agreed value, policies pro rate actual loss.

(38-75-220)

Property subject to valued policy law: Mobile homes.

Perils subject to valued policy law: All insured perils.

Other comments/special provisions: If total amount of two or more policies exceeds agreed value, policies pro rate actual loss.

South Dakota (58-10-10)


Property subject to valued policy law: Real property, except appurtenant structures.

Perils subject to valued policy law: Fire, lightning, or tornado.

Other comments/special provisions: The law does not apply if the loss occurs in the first ninety days of a new policy or within ninety days of an increase in insurance of 25 percent or more in an existing policy. Builders risk policies are actual cash value.

Tennessee (56-7-801, 802, -803)


Property subject to valued policy law: Any building or structure.

Perils subject to valued policy law: Fire.

Other comments/special provisions: Agent must inspect and establish value within ninety days. Otherwise, policy is open and insured is entitled to return of difference in premium with 6 percent interest for overinsurance.

T.C.A. § 56-7-801 – Provides that there is a period of 90 days after which a “fire insurance policy” is issued for an inspection to occur, and prohibits any “fire insurance policy” being issued for an amount in excess of the fair market value of any building or structure; T.C.A. § 56-7-802 – Provides for a return of premium where buildings “totally destroyed by fire” were over-valued and too high a premium was charged. The statute applies to “buildings within the state insured against loss by fire” which “are totally destroyed by fire”; and T.C.A. § 56-7-803 – With respect to losses occurring more than ninety (90) days after policy inception, the statute provides that the value as shown on the application or policy shall be “conclusively presumed to be reasonable, and settlement shall be made on that basis.”

Texas (Ins. Code 862.053)


Property subject to valued policy law: All except personal property.

Perils subject to valued policy law: Fire.

Other comments/special provisions: A property insurance policy on a totaled building is a "liquidated demand" against the insurer for the full amount of the policy.

West Virginia (33-17-9)


Property subject to valued policy law: Real property.

Perils subject to valued policy law: All policy perils.

Other comments/special provisions: Law does not apply where insurance has been obtained from two or more insurers covering the same interest in the property.

Wisconsin (632.05(2), WI ADC Ins. 4.01)


Property subject to valued policy law: Owner occupied dwellings. 

Perils subject to valued policy law: All policy perils.

Other comments/special provisions: The law applies to seasonal dwellings not rented to a nonowner for any period of time. Khonen v. Wisconsin Mut. Ins. Co., 111 Wis. 2d 584 (Wis. App. 1983). The law does not apply to residences used for commercial (nondwelling) purposes other than on an incidental basis. Seider v. O’Connell, 236 Wis.2d 211 (Wis. 2000).

Related: 10 dos and don'ts to prevent home fires

Related

A look at replacement cost value vs. actual cash value

Determining value in a property loss depends on several factors.

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