• Agreed Value Basis, also referred to as the agreed amount clause, is one of the various options available to homeowners when acquiring home insurance. Many homeowners prefer this insurance clause due to its unique benefits and simplified implementation process. In this article, you will discover more about the agreed value basis in home insurance, how it functions, and a straightforward example.

Agreed amount clause and its interpretation in insurance contracts: A short examination

• An agreed amount clause is understood as a provision within the home insurance policy that establishes the value of the property to be insured at the point when the policy is purchased by the policyholder in collaboration with the insurance company. The total loss amount specified as a value and acknowledged by both parties in the policy contract is what the insurance provider will cover in events such as a fire, storm, or theft, for example. For instance, this amount is typically less than the current fair market value of the property but carries the specific benefit of facilitating easier and quicker claims processing, eliminating disputes over the amount that is otherwise rightly owed based on the value of the lost property.

How does an Agreed Amount Clause work?

• The Agreed Amount Clause indicates that both the insurance company and the policyholder agree upon the coverage amount. This amount remains constant throughout the policy’s duration unless adjustments occur due to changes in the property structure or the policy terms. Once the agreed value has been reached, the insurance company is obligated to cover the expenses related to restoring or recovering the property to the agreed value in the event of a loss, as per the policy agreement.

• An agreed amount clause can benefit both parties involved. Homeowners can benefit from a straightforward loss process where minimal conflicts arise regarding the property’s value within the homeowners’ premises. Additionally, the agreed value leads to more affordable premiums since the insured pays for a pre-determined value rather than the potentially inflated current market price.

• On the other hand, insurance companies can sidestep issues in claim processing, particularly those related to claim disputes, and achieve more predictable payment of claims. This can help in minimizing losses and decreasing costs linked to claims processing and settlements.

Role of Agreed Amount Clause

• An Agreed Amount Clause is significant within home insurance, building insurance, and property insurance in the Indian context. It establishes the face value between the insurer and the policyholder, particularly regarding the payable amount in claim situations. This clause is advantageous for both parties as it sets a claim limit, which is very useful for future claims, helping to prevent any misunderstandings.
• Agreed value basis in insurance refers to a method wherein the insured amount for a policy is determined based on a mutually decided figure between the insurer and the policyholder. Firstly, this method eliminates the need for the insurer to evaluate or estimate the value of the insured property at the time of loss – a task that can often be quite tedious.
• The agreed amount clause, which is common in India, is also utilized in the majority of home insurance policies within the country. These policies usually cover losses to the home structure, furnishings, and personal belongings resulting from incidents like fire outbreaks, burglary, and natural disasters.
• Under an agreed value basis, the insurer and policyholder come to an agreement regarding the amount that is to be insured. This method is particularly effective when the homeowner is confident about the property’s value, as it helps avoid undercompensation if an accident occurs.

The significance of the Agreed Amount Clause

• The prevalence of agreed amount clauses is also notable in building insurance within India. This type of insurance guards commercial or residential structures against losses arising from various hazards such as fire, lightning, storms, and more. By accepting a set amount as the insured value, claims can be managed more effectively since the intricate processes of property valuation are bypassed.
• The agreed amount clause is similarly included in property insurance policies in India, which cover various types of properties including factories, warehouses, and office spaces. This approach is advantageous as the company and policyholder evaluate the property’s worth together and establish an agreed figure, minimizing disputes when a claim needs to be settled. It proves highly beneficial when the company is aware of its asset’s value or needs to protect its interest to recoup damages incurred.

Example of an Agreed Amount Clause

• Let us examine a scenario of how an Agreed Amount Clause may function in a real situation:
• The house they possess holds a market value of Rs. 4,00,000. They still have the option to insure their home on an Agreed Value Basis with a policy limit of Rs. 3,50,000. They consider this choice as straightforward and convenient because they feel their homes are undervalued in the market.

• If a loss occurs, such as a fire, and the insured’s home needs reconstruction, the insurance company is obligated to cover the repair or reinstatement costs, up to the pre-loss agreed value of Rs. 3,50,000. As they are utilizing their funds to recoup expenses related to rebuilding or mending their home, this is the course the insured individuals are pursuing.

• In this scenario, if reconstruction expenses amount to Rs. 3,60,000, the insurance company would disburse Rs. 3,50,000, while the insured would need to pay Rs. 10,000. Conversely, if the rebuilding costs were only Rs. 3,40,000, the insured would receive the entire Rs. 3,50,000 payout and reduce the deductible.

Conclusion

• The agreed value basis in home insurance, commonly known as the agreed amount clause, is a type of insurance coverage that has both advantages and disadvantages. By requiring homeowners to consent to a predetermined fixed value for the insured property, they benefit from a straightforward claims process and potentially reduced rates. Insurance companies experience a more favorable and conflict-free claims environment compared to that faced by an oil company. Ultimately, it is essential for households to carefully evaluate each option and select the type of coverage they prefer.

Disclaimer: The information provided above is for illustrative purposes only. For further details, please refer to the policy wording and prospectus prior to finalizing the sales.