South Carolina Personal Lines Practice Exam

In an agreed value policy, what is established between the parties?

1. The maximum allowable loss

2. The replacement cost at time of loss

3. The fair value paid at time of loss

4. The depreciated value of an asset

The correct answer is: The fair value paid at time of loss

In an agreed value policy, the correct answer involves the determination of a preset amount that both parties—namely the insured and the insurer—agree will be paid in the event of a covered loss. This amount is established at the time the policy is created, reflecting the fair value of the asset covered by the policy. The essence of an agreed value policy is to eliminate disputes over the value of the property at the time of loss, ensuring that the insured receives a predetermined and fair amount that corresponds to the risk evaluated when the policy was formulated. This system is particularly useful in cases where valuation is challenging, such as with unique or high-value items where depreciation would complicate the settlement process. By establishing this figure ahead of time, policyholders gain peace of mind, knowing that if a loss occurs, they will receive the agreed-upon amount without further negotiation or argument over the valuation.