Legal Definitions - valued-policy law

A valued-policy law is a specific type of state statute that governs property insurance claims, particularly in cases of total loss. This law requires an insurance company to pay the policyholder the full amount for which a property was insured if that property is completely destroyed, regardless of its actual market value at the time of the loss. Essentially, it prevents insurers from arguing that the property was worth less than the policy's face value once a total loss has occurred, ensuring the insured receives the agreed-upon amount.

• Example 1: Residential Home Fire

  Imagine a homeowner insured their house for $400,000. Several years later, a devastating fire completely destroys the home, rendering it a total loss. Due to a downturn in the local real estate market, an appraisal conducted after the fire determines the house's market value at the time of the loss was only $350,000.

  How it illustrates the term: If a valued-policy law is in effect in that state, the insurance company would be legally obligated to pay the homeowner the full $400,000 stated in the policy, even though the property's market value at the time of the fire was lower. The law ensures the insured receives the agreed-upon policy limit for a total loss.

• Example 2: Commercial Building Collapse

  A small manufacturing business had its factory building insured for $1,500,000. A severe earthquake causes the building to completely collapse, making it structurally unsound and a total loss. An independent adjuster hired by the insurance company estimates the depreciated actual cash value of the building just before the earthquake was $1,300,000.

  How it illustrates the term: Under a valued-policy law, the insurance company cannot pay the business only the $1,300,000 estimated value. Instead, they must pay the full $1,500,000 for which the factory was insured, honoring the policy's face value for a total loss.

• Example 3: Historic Landmark Destruction

  A non-profit organization owned a unique, historic community hall, which they had insured for $750,000, reflecting its irreplaceable cultural value beyond its mere construction cost. A powerful tornado completely demolishes the hall. While the cost to rebuild a modern structure of similar size might only be $600,000, the historic nature made it more valuable to insure.

  How it illustrates the term: Because of a valued-policy law, the insurance company must pay the non-profit the full $750,000 stated in the policy. The law prevents the insurer from reducing the payout based on a lower "true value" or replacement cost for a generic building, upholding the agreed-upon insured amount for this specific, totally destroyed property.