# Valuation Clause: What It Means, How It Works, Types

> **Definition**
>
> A valuation clause is a provision in an insurance policy that specifies the amount the policyholder will receive from the insurer in the event of a covered loss based on various valuation methods.

## What Is a Valuation Clause?

The term valuation clause refers to a provision in some [insurance policies](https://www.investopedia.com/terms/i/insurance.asp) that specifies the amount of money the policyholder will receive from the insurance provider if a covered hazard event occurs. This clause stipulates a fixed amount to be paid in the event of a loss for an insured property. There are several types of valuation clauses that can be written into a policy, including actual cash value and replacement cost, among others.

### Key Takeaways

*   A valuation clause is a provision written in an insurance policy that determines the fixed amount a policyholder may receive in the event of a claim.
*   There are many different methodologies used in a valuation clause, such as agreed value, replacement cost, or stated amount.
*   Actual cash value is the most commonly utilized language, where the amount paid for a claim is equal to the insured's pre-loss value.

## Understanding Valuation Clauses

As noted above, valuation clauses are insurance policy provisions. They are written into insurance contracts and state the amount the insurer reimburses to the insured party in the event of a loss of [property](https://www.investopedia.com/terms/p/property.asp). Valuation clauses are based on an array of different factors about the specific property and individual budget requirements.

Determining the cost of articles covered by insurance is an essential but time-consuming step in getting insurance coverage. By understanding how much an item is worth, the policyholder is better able to determine the level of coverage they require. Policyholders should also determine their coverage based on [maximum foreseeable loss](https://www.investopedia.com/terms/m/maximum-foreseeable-loss.asp).

Insurance providers may also require a review by an appraiser or specialist to determine the value of a property before underwriting. This requirement is particularly true in cases where the policyholder gets insurance coverage for classic, antique, customized, and one-of-a-kind property, as well as for historic structures or items. An [appraisal](https://www.investopedia.com/terms/a/appraisal.asp) may be required if a policyholder tries to get insurance in a dollar amount that exceeds the assessed value of a property.

There are several key factors that policyholders should be aware of when it comes to the valuation clauses associated with their insurance policies. For instance:

*   Insured parties should carefully review any policy with a [valuation](https://www.investopedia.com/terms/v/valuation.asp) clause so they understand the circumstances when a benefit payment is necessary.
*   Policyholders should also do a regular review of the listed dollar value for the property.

Keep in mind that values that do not keep up with the reasonable cost of living, [inflation](https://www.investopedia.com/terms/i/inflation.asp), or changes to the local building code cost increases may not adequately protect the policyholder. 

> **Important**
>
> In some cases, the insurance provider may expect the insured to periodically update the value of items covered in the policy using a full reporting clause.

## Special Considerations

Valuation clauses are also common outside the insurance industry. As such, they are used in contracts to highlight the value of assets. For instance, corporations may put valuation clauses in the contract for [mergers and acquisitions (M&A)](https://www.investopedia.com/terms/m/mergersandacquisitions.asp). In other cases, these clauses may be used in distribution or [licensing agreements](https://www.investopedia.com/terms/l/licensing-agreement.asp) between two companies.  

## Types of Valuation Clauses

Two of the most common types of valuation clauses are the actual cash valuation clause and the replacement cost valuation clause. There are other types as well—all of which are discussed in more detail below.

### Actual Cash Valuation Clause

The actual cash valuation clause or [actual cash value (ACV)](https://www.investopedia.com/terms/a/actual-cash-value.asp) is the most frequently used method to calculate property benefit values in a homeowners policy. This value is based on the cost of repairing or replacing a piece of property, such as a boat, a car, or a home, to its pre-loss status. The insurer factors the [depreciation](https://www.investopedia.com/terms/d/depreciation.asp) of the property into its value. Depreciation determines how much of an asset's useful lifespan value remains and will impact the benefit value due to the policyholder in the case of a covered loss.

Another consideration of an ACV policy is the [valued policy law (VPL)](https://www.investopedia.com/terms/v/valued-policy-law-vpl.asp). Arkansas, California, Florida, Georgia, Kansas, Louisiana, Massachusetts, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Carolina, North Dakota, Ohio, South Carolina, South Dakota, Tennessee, Texas, West Virginia, Wisconsin, and Wyoming all have valued policy laws.

Under this regulation, insurance providers must pay the full, listed [face value](https://www.investopedia.com/terms/f/facevalue.asp) of a policy in the event of a total loss, without consideration of the depreciated actual cash value. The law requires the payment of the full face value of the policy even if the value at the time of loss is a lower dollar amount. However, in some situations where there is [concurrent causation](https://www.investopedia.com/terms/c/concurrent-causation.asp) for damage, the insurer may issue a reduced payment.

### Replacement Cost Valuation Clause

The [replacement cost](https://www.investopedia.com/terms/r/replacementcost.asp) is the amount necessary to repair or replace a piece of property to the same or equal level of quality as the original property. These costs may change, as the prices in the marketplace change. Depreciation of the property is not a consideration in replacement cost coverage. However, unless a policy also contains a law and ordinance provision, it may not include enough coverage to satisfy all the costs of rebuilding a property.

The [law and ordinance clause](https://www.investopedia.com/terms/b/building-ordinance-coverage.asp) increases the replacement benefit amount by a percentage to allow for changes to the state building code. This provision becomes crucial in the case of a covered hazard that destroys the property to 50% or more. Most local building codes will require structures that receive damages totaling 50% or more of the home's insured value to be demolished and rebuilt to current codes. Policyholders must understand that coverage only applies to the damaged portion of a structure.

### Other Types of Valuation Clauses

The following are some other, less common types of valuation clauses:

*   **Stated Valuation Clause:** Also known as a [stated value](https://www.investopedia.com/terms/s/statedvalue.asp), this amount is usually found in automobile coverage. It refers to the maximum value placed on the property by the policyholder once the contract is written. This is the amount a buyer pays for the property if you sell it. However, most stated value policies contain wording that, in the case of loss, allows the insurer to pay the lesser of either the stated value or actual cash value.
*   **Agreed Valuation Clause:** An [agreed value clause](https://www.investopedia.com/terms/a/agreed-amount-clause.asp) policy uses an agreed-amount provision to stipulate the value of an insured property. The clause, which is found in the damages section of the policy, should define what happens to the property in the case of a total loss. The agreed-upon value may be a fair market worth or another sum decided upon by both the insurer and the insured party.
*   **Market Valuation Clause:** This clause is also referred to as a [market value clause](https://www.investopedia.com/terms/m/market-value-clause.asp). It is part of a policy that defines the value of the covered property at a market rate, rather than actual or replacement cost. Such a clause would set the value a policyholder could get for the loss of an asset at the amount they could receive by selling it on the open market.

## Example of Valuation Clauses

Here's an example of how valuation clauses work. Let's say a driver takes out a policy with ABC Insurance on their new car. The [car insurance company](https://www.investopedia.com/best-car-insurance-companies-4783675) puts a provision into the policy indicating the amount it will reimburse the driver if the car is totaled in a no-fault accident. The company may introduce an actual cash value, which is the total value less depreciation.

## Why Are Valuation Clauses Important?

Valuation clauses are provisions that insurers put into insurance contracts. They inform the insured party how much they receive if they file a claim. These clauses can range in type from the actual cash value to the replacement cost value, among others.

In areas other than insurance, they indicate the value of assets that are described in a contract. For instance, a buyer may outline the amount of money they are willing to pay to a seller of property and equipment.

## Do Valuation Clauses Only Apply to the Insurance Sector?

No. Although they are very common in insurance, valuation clauses are also applied in different types of business contracts. They may be used in corporate [mergers and acquisitions (M&A)](https://www.investopedia.com/terms/m/mergersandacquisitions.asp), distributions, and licensing agreements. Valuation clauses are put into place in order to determine the value of assets between two or more parties.

## What Effects Do Valuation Clauses Have on Insurance Claims?

Valuation clauses have a big impact on insurance claims. They indicate the type of valuation method that an insurance company uses to reimburse their clients when a claim is filed. These methods include actual cash, replacement cost, stated value, agreed value, and market value. Since they are written into the contract, policyholders should be well aware of how much they can expect to receive if and when they file a claim with the insurer in the event of loss.

## The Bottom LIne

Insurance can be a complicated and complex issue. There are different nuances that consumers need to understand about their policies before they sign on the dotted line. For instance, you should be aware of any valuation clauses in your policy. These are provisions that the insurer writes into your contract that will tell you the value of your property when and if you file a claim. This is the amount you'll receive in the event of a loss.

> **Article Sources**
>
> 1.  Big I. "[Valued Policy States](https://www.independentagent.com/vu/SiteAssets/Pages/checklist/checklist/Valued-Policy-State-List.pdf)."