What is Loss Settlement Amount?
Loss settlement amount is a term used to denote the amount of a propertyinsurance settlement, whether real estate or personal property. The loss settlement amount largely depends on which type of loss cost settlement option a policyholderhasagreed to in theirhomeowner's insurance policy.
How Loss Settlement Amount Works
The loss settlement amount isthe funds that aninsurance company pays out to the homeowner in the event of a homeowner's insurance claim.In the case of homeowner's insurance, homeownersare typically required to carry insurance that will cover at least 80 percentof the replacement value of their house.
Key Takeaways
- There are three loss settlement optionsoffered by insurance companies: agreed value, replacement cost value, and actual cost value.
- The most expensive premiumsare usually attached to the replacement cost rather than the actual cash value option.
- The third option is the agreed value option, which requires an independentappraiser to help the insurer and the insured agree on the value of the object being insured.
However, the loss settlement amount may be less than the amount of full coverage if the 80 percentcoinsurance requirement is not met.
Every homeowner'sinsurance policy contains a loss-settlement provision that details how aclaim will be paid. This provision applies to the replacement cost payment for both the dwelling and the personal property. The policy might have a recoverable depreciation clause to offset the deterioration in the value of the insured property.
Unfortunately, the provision mayallowthe insurance company to delay full payment of the claim by paying only the actual cash value of the loss and, in some instances, forego full payment altogether because the insured does not have sufficient funds to repair or replace.
A loss-settlement provision is a part of every homeowner's insurance policy, and it outlines how a claim will be paid out to the insured.
Examples of Loss Settlement Amount Options
Thethree loss settlement options areactual cash value,replacement cost,andagreed value.Actual cash value (ACV)usually carriescheaper premiumsthan replacement cost, which is why many people end up with his type of loss cost settlement option.For a car, ACV would be defined as "fair market value" or the cost for a new car minus depreciation.
For example, if acar was $20,000 brand new, and apolicyholdertotaled it after owning it for a few years, theywould not get the full $20,000, but rather a lower amount, perhaps only $10,000 or even less depending on how old it is.
Replacement cost coverage,on the other hand, is a superior loss cost settlement option for homeowners. Although moreexpensive,it will pay whatever is necessary to replace your damaged property with property of a like kind and condition, up to the policy limits.
Theagreed value loss cost settlement optionis typically reserved for unique items, or items of high worth where the value cannot be easily assessed.For example, if you are insuring a rare coin or an expensive painting, you and the insurance company will have to agree on what the item is worth at the time the policy is written, which is what you will be paid if it is destroyed. Often an independent appraisal will satisfy this requirement.
