Agreed Amount Clause

If you didn't already think insurance policies were a bureaucrat's dream, here's some proof:
An agreed amount clause, also sometimes called an agreed value clause, or even occasionally the agreed value optional coverage, waives the co-insurance agreement in an insurance contract.

Tangled enough? We'll break it down a bit.

Sometimes companies purposely choose to under-insure their property. Basically, they are betting that any damage they incur will not actually totally destroy the property. They are effectively gambling that even a bad loss won't get that bad.

So for instance, if the company has a property worth $50,000, they might insure just $30,000 of it. This allows the company to save money on insurance, with the hope that nothing completely devastating will take place.

To counteract this, insurance companies have added so-called "co-insurance clauses" to contracts. These stipulations force companies to state what percent of a property's total worth is being insured. So the policy might state that it is insuring 80% of a property worth $50,000. The company then becomes a co-insurer of the property, taking on responsibility for the other 20% of coverage itself, hence the name "co-insurance clause."

Now, if the company still chooses to underinsure the property, the insurance company has an out for some of its liability. So say the co-insurance clause states that the policy covers 80% of a $50,000 property (which would be $40,000, by the way.) Now say the company buys $30,000 worth of insurance. That year, a storm hits that causes $20,000 worth of damage. The insurance company has to pay $20,000, right? After all, the policy covers $30,000, and $20,000 is under that limit, so the insurance company is on the hook for that amount. Not quite. Because the company only covered $30,000 and not the $40,000 stated in the co-insurance clause, the insurance company only needs to cover $15,000. (Since $30,000 is 3/4 of $40,000, the insurance company only needs to pay 3/4 of the damages.)

Okay, so that's that. Now, here's where the agreed amount clause steps in. This provision effectively negates the co-insurance clause. To get the agreed amount clause included, the company gives the insurance provider a statement indicating the value of the property in question...hence the "agreed value" part of the name. Once the parties have reached an agreement on the value, the additional clause gives the insured company more protection, though usually at some additional cost for the insurance.