Legal Definitions - agreed-amount clause

An agreed-amount clause is a specific provision within an insurance policy where the policyholder and the insurance company mutually agree on a predetermined minimum amount of coverage that the policyholder must maintain for a particular asset or risk. This agreement often means that if a covered loss occurs, the insurer will not apply penalties for underinsurance, provided the agreed amount of coverage was maintained.

Here are some examples to illustrate this concept:

• Commercial Property Insurance: A manufacturing company owns a factory building valued at $10 million. To ensure adequate protection and simplify potential claims, their commercial property insurance policy includes an agreed-amount clause. This clause stipulates that the company must carry at least $9 million in coverage for the factory. If a major fire damages the building, and the company has maintained this $9 million coverage, the insurer will process the claim based on the loss (up to the policy limit) without reducing the payout by arguing that the property was underinsured relative to its actual replacement cost.

• Homeowner's Insurance for a Unique Property: A homeowner possesses a historic mansion with intricate, custom-built features that make its exact replacement cost challenging to estimate. To avoid disputes in the event of a catastrophic loss, the homeowner and their insurer agree to an agreed-amount clause. This clause specifies that the homeowner will maintain $2.5 million in dwelling coverage. Should the mansion be completely destroyed by a covered peril, the insurer will honor the $2.5 million coverage without invoking co-insurance clauses, as long as the homeowner consistently maintained that agreed amount.

• Business Interruption Insurance: A large retail chain wants to protect itself against significant income loss if one of its flagship stores is forced to close due to a covered event, like a natural disaster. Their business interruption insurance policy contains an agreed-amount clause requiring the chain to maintain coverage for at least $5 million in potential lost profits and continuing expenses for a 12-month period. This ensures that if a major disruption occurs, the insurer will not contend that the business was underinsured for its actual potential income loss, thereby streamlining the claims process and providing greater financial certainty.