Insurance To Value

What Does Insurance To Value Mean?

Insurance to value is a concept used by insurers to determine how much to pay for covered losses under homeowners’ policies. Generally, policyholders are required to carry coverage equal to at least 80% of their home’s value. If coverage falls below this 80% threshold, the amount payable on claims will be reduced from the standard replacement cost (minus the deductible).

Insuranceopedia Explains Insurance To Value

These two examples illustrate how the insurer calculates the payable amount when the insured has less than the required 80% insurance-to-value. In these cases, the insurer pays the greater of (1) the actual cash value, or (2) the amount based on the ratio of insurance carried to the insurance required. Note that the deductible is subtracted from the loss before applying the coverage percentage, which is standard for homeowners’ policies and generally results in a slightly higher payout than if the deductible were applied afterward.

Example 1:

• Replacement value of the house: $400,000
• Required coverage (80% of value): $320,000
• Actual coverage: $275,000
• Full roof replacement cost: $9,000
• Actual cash value of the roof: $8,000
• Policy deductible: $500

Since the insured’s coverage is less than 80%, the amount paid by the insurer is calculated as follows:

1. Calculate the fraction of insurance carried to required coverage:
   275,000 / 400,000 = 68.8%
2. Apply this fraction to the loss after the deductible:
   9,000 − 500 = 8,500
   0.688 × 8,500 = 5,848
3. Compare with actual cash value:
   • Actual cash value: $8,000
   • Amount based on fraction: $5,848

Since the actual cash value is higher, the insurer pays $7,500 (actual cash value less deductible, $8,000 – 500). If the insured had met the required 80% coverage, the insurer would have paid the replacement cost less deductible, or $8,500.

Example 2:

• The same details as Example 1, except the roof’s actual cash value is $5,000.

Calculations:

1. Fraction of insurance carried to required coverage:
   275,000 / 400,000 = 68.8%
2. Loss after deductible applied and coverage fraction:
   9,000 − 500 = 8,500
   0.688 × 8,500 = 5,848
3. Compare with actual cash value:
   • Actual cash value: $5,000
   • Amount based on fraction: $5,848

In this case, the fraction-based amount is the higher value, so the insurer pays $5,848. If the insured had carried the minimum required $320,000 coverage, the insurer would have paid the replacement cost less deductible, or $8,500.