What Is Valued Policy Law?
Let me explain what Valued Policy Law, or VPL, really is. It's a legal statute that forces insurance companies to pay out the full value of your policy if there's a total loss. VPL doesn't bother with the actual cash value of your property at the time of the loss; it just mandates that you get the total payment as stated.
You should know that a valued policy is different from an unvalued or open insurance policy. In those, you'd have to prove the property's value after the loss using things like invoices, estimates, or claims adjusters' reports.
Key Takeaways
- Valued Policy Law is a legal mandate that insurers cover the full value of a property if the damage is deemed a total loss.
- The value to be repaid under VPL can be arrived at using either the actual cash value or replacement cost method.
- In the U.S., only certain states have valued policy law on the books, whereas in other states losses subject to insurance must be proven.
Understanding Valued Policy Law
A total loss happens when your insured property is destroyed or damaged so badly that it can't be recovered or repaired for further use. When that occurs, it often triggers the maximum settlement according to your policy terms.
Insurance policies typically use one of two methods to figure out the loss value: actual cash value or replacement cost. Actual cash value is the standard for determining insurance needs, loss payments, and coinsurance—it's replacement cost at the time of loss minus depreciation. But case law and state legislation are changing this through the broad evidence rule, which says actual cash value should include all relevant evidence, like replacement cost less depreciation and fair market value.
Replacement cost means the company pays to repair or replace after deductible, without depreciation.
In general, valued policy laws require that the amount in your policy declarations is the dollar amount paid at loss time. If the item's value at loss is less than insured, the insurer can't contest full payment. In most VPL states, any inconsistent policy provision is void.
Not all U.S. states have these laws. The ones that do include Arkansas, California, Florida, Georgia, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Ohio, South Carolina, South Dakota, Tennessee, Texas, West Virginia, and Wisconsin.
Wisconsin was the first state to pass a Valued Policy Law in 1874.
Valued Policy Law Controversy
Hurricane Katrina made the insurance industry in Louisiana take a hard look at Valued Policy Law. Few policyholders got their entire coverage amount due to how the law was interpreted. Some insurers argued it didn't apply because losses came from non-covered perils like flood, or from 'mixed causation'—a mix of covered wind and non-covered flood—and that total losses were offset by things like the National Federal Flood Insurance Program and FEMA grants.
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