Legal Definitions - agreed value

Agreed value refers to a specific monetary amount that two or more parties formally decide upon and accept as the worth of an item, asset, or service. This value is established in advance, often in a contract or insurance policy, and will be used for specific purposes, such as determining compensation in case of loss or damage, or for a transaction. It is particularly useful when the market value of an item is difficult to ascertain, highly variable, or when parties wish to avoid future disputes over valuation.

Here are some examples to illustrate the concept of agreed value:

• Insurance for a Rare Collectible: A person owns a unique, hand-built classic car that is one of only ten ever produced. Because its market value can fluctuate significantly and is challenging to appraise consistently, the owner and their insurance company agree in writing that the car has an "agreed value" of $200,000. If the car is stolen or completely destroyed, the insurance company will pay out $200,000, regardless of what a market appraisal might suggest at the exact time of the loss. This agreement prevents disputes over the car's worth after a damaging event.

• Contract for Custom Software Development: A startup hires a software firm to develop a highly specialized, proprietary application. The contract includes a clause stating that if the client decides to terminate the project prematurely without cause, the "agreed value" of the work completed up to that point will be calculated based on a pre-determined milestone payment schedule, rather than an hourly rate or a subjective assessment of progress. This ensures both parties have a clear understanding of the financial implications of early termination.

• Sale of a Family Business Share: In a family business, siblings agree to a buy-sell agreement that specifies an "agreed value" for each share of the company stock. This value is reviewed and updated annually. If one sibling decides to leave the business or passes away, the remaining siblings or the company itself will purchase their shares at the last agreed-upon value, simplifying the transaction and avoiding the need for a complex, potentially contentious valuation process during an emotional time.