How do insurers determine settlement amounts?
Insurers calculate settlements based on the terms of the customer’s insurance policy.
All insurance policies state the basis on which the insurer calculates loss payments. There are many different forms, including:
Replacement cost. This is the cost to replace damaged property with new property that is similar in kind and quality.
Guaranteed replacement cost. The same as replacement cost basis, but the policy will cover the full cost of replacement even beyond the policy limits. In home insurance, guaranteed replacement cost is normally only available for the building—not the contents.
Actual cash value. Again, the replacement cost of an item, but this time with depreciation subtracted from its value.
Market value. This is the value of damaged property if it were put up for sale. Basically: what it would be worth in a garage sale or at a flea market. The market value of most items is less than their replacement value. Rare collectibles or valuable jewellery, meanwhile, may be worth more under market value.
Agreed value. Agreed value means the policy will pay a specific amount for lost or damaged property. The insurer and insured will have agreed to that amount beforehand.
Regardless of how the settlement is calculated, it's still subject to the policy's coverage limits. There's also nearly always a deductible subtracted from the amount, too.