Texas General Lines — Property and CasualtyProperty and Casualty Insurance BasicsMedium
A commercial building is insured under a property policy with a $500,000 limit. The building's actual cash value (ACV) at the time of a total loss is $400,000. The policy includes a Valued Policy clause. How much will the insurer pay for the total loss?
- A$500,000, the policy limit.
- BAn amount determined by appraisal.
- C$400,000, based on the ACV.
- D$0, as ACV is less than the limit.
Show answer & explanationAnswer & explanation
Correct answer: A. $500,000, the policy limit.
A Valued Policy clause specifies that in the event of a total loss, the insurer will pay the face amount of the policy, regardless of the actual cash value or replacement cost, as the value was agreed upon at policy inception.
Why the other options are wrong
- B. Appraisal is used to resolve disputes over loss amount, not to determine payment under a Valued Policy.
- C. ACV is irrelevant with a Valued Policy clause for a total loss.
- D. This is incorrect; a Valued Policy guarantees payment up to the face amount for a total loss.
Valued Policy
A policy that pays the face amount of insurance if a total loss occurs, regardless of the actual cash value of the property.
- Value is agreed upon at policy inception.
- Typically used for unique or hard-to-value items.
- Applies only in the event of a total loss.
Memory trick: Valued policies pay what was 'valued' not what's 'actual' for total loss.