Post written by: Ruth Knopf JD, CPCU, CIC ARM, AU
A business purchases physical damage coverage on vehicles to protect their assets and transfer the risk of financial loss. In the case of theft, collision, or other physical damage, the business will not be at risk of having to pay for the loss but will expect the insurance carrier writing their policy to pay for a new vehicle or repair damages.
But, how much will the insurance company pay? There are three options that are used to determine how a loss for physical damage will be paid. Businesses should discuss their expectations and goals for recovery with their agent to ensure they will be compensated as they expect they will be.
Actual Cash Value (ACV)
This option examines what the vehicle was worth in cash the day before it was crashed. These values are easily determined by what the vehicle cost when it was new, market depreciation, and expected wear and tear. They can also be verified by 3rd party sources, such as National Automobile Dealer’s Association (NADA) or Kelley Blue Book. ACV is the most common vehicle valuation, and results in fair payouts where vehicles are newer and produced in volume. Conflicts arise where special interest items and market values are not so easily determined.
There are a few companies that offer Agreed Value in special circumstances. In this case, the business and the insurance company agree on the value of the vehicle at the time coverage is written. In the case of a total loss, the insurance company guarantees to pay the value that is designated on the policy.
Coverage written with an agreed value option takes a little more work as values must be established then justified, but it is worth the peace of mind to know that in the case of a loss, the business will be paid the true value of the vehicle.
An example of Agreed Value policy language is,
“In the event of theft or a total loss we will pay the Agreed Value.”
The use of this option is where misunderstandings often occur. When a policy is written with the stated value option, businesses often believe that they will be paid the “stated value” or “stated amount” shown on the policy for a vehicle in the case of a loss. In reality, the stated value is the most that the insurance company will pay.
This is what the policy language says where coverage is written on a stated value basis,
“In the event of theft or a total loss we will pay the Stated Value
or the Actual Cash Value, whichever is less.”
An insurance company might use this option to make sure it does not pay more than they anticipated when the policy was written. It can also be used to avoid a debate of value due to the age of a vehicle or permanently installed equipment. In most cases the insurance company will benefit by using this option. A business should only select this option where the benefit is fully understood.
There are circumstances where the Stated Value option can benefit the business. Stated Value can be used to determine how much premium you pay. Not how much you get paid. Stated Value lets you insure a vehicle for less than what it is really worth in exchange for a lower premium.
Two examples of when Stated Value is beneficial to the insured can be found in a newsletter found on the Independent Insurance Agents and Brokers website.
1. Trucking account with 100+ truck/tractors.Given that the truck/tractors are dispersed over a wide geographical area (not subject to the same concurrent peril), and the relatively modest amount of physical damage a truck would sustain in an accident, some insureds will accept a physical damage limit which is less than ACV, in order to obtain a premium savings which could be significant with a large fleet of vehicles.
- Example: 2010 model year truck/tractor – representative of the fleet
- Cost new = $145,000
- ACV = $110,000
- Stated Amount $70,000 (+/-)
- Repair costs: (a) $50,000 (paid); (b) $75,000 (max payable $70,000)
- Total loss; $70,000 (insured understands this risk, and will retain the established risk in exchange for the reduced premium)
2. Risk where vehicles are customized with attached equipment. Certain classes of business add a considerable amount of after market equipment. The standard rating for trucks is based on original cost new and age group (which reflects ACV).
Since ACV is not stated in dollar amounts, in cases where $20,000 or so of equipment has been added the vehicle, some insurers have found that they were experiencing bad physical damage loss ratios due to not having received adequate premium for the vehicle plus its after market equipment. There is no exclusion in the BAP for after market or electronic equipment as there is in PAP.
- Example 2010 model year vehicle – representative of the fleet
- Cost new = $145,000
- After-market equipment added: $20,000
- ACV = $125,000 (insurer based rating on $110,000 ACV, but would owe $125,000 in total loss.)
- Stated amount = $90,000 (+/-)
- Repair costs: (a) $50,000 (paid); (b) $95,000 (max payable $90,000)
- Total loss: $90,000 (insured understands this risk, and will retain the established risk in exchange for reduced premium)
An alternative to using “stated amount” is to write a chassis on the business auto coverage part and cover the added equipment under inland marine, on the same package policy.
Image credit: Flickr Creative Commons, Tony Atler