Ask Mike
#2012-03
Subject: Stated Amount vs. Agreed Value in PAP and BAP
Q. I have a question about a subject that doesn‟t come up very often, and so I‟m a little
fuzzy on it. Can you give me a comparison between stated amount and agreed value in
auto policies – both personal and commercial? Also, a math example would help,
especially when I‟m discussing this with insureds.
A. You‟re not alone on this subject – but it comes up more frequently than you may
think. And you‟re right, it can seem a little fuzzy sometimes. Actually, it‟s “doublefuzzy,” because as you suggest, it‟s really a two-part issue. First, it‟s important to
understand how the two concepts differ. Second, being able to illustrate how each
concept works in an actual situation is helpful, so the insured can make an informed
decision about which method is appropriate for any particular situation.
One point of confusion is that the terms “stated amount” and “agreed value” don‟t really
give a clear picture of what their basic concept is. And to make things a little more
weird, they each go by slightly different variations. For example, “stated amount” is
sometimes referred to as “stated value.” And “agreed value” is sometimes called
“agreed amount.” The obvious difference is that one is “stated,” and the other is
“agreed.” Here „s how I keep them straight. From the insurer‟s point of view, they look
at a dollar figure placed on some item of property such as an auto, and say, “Just
because you stated is doesn‟t mean we agreed with it.”
Let‟s look at how these two concepts work in the PAP and the BAP.
Personal Auto Policy
Before we analyze how these two concepts differ, it‟s important to review how the
unendorsed PAP values an auto in a physical damage claim. Excerpt from the ISO
PP 00 01 01 05:
Part D – COVERAGE FOR DAMAGE TO YOUR AUTO
LIMIT OF LIABILITY
A. Our limit of liability for loss will be the lesser of the:
1. Actual cash value of the stolen or damaged property; or
2. Amount necessary to repair or replace the property with other property of like kind and
quality.
B. An adjustment for depreciation and physical condition will be made in determining actual cash
value in the event of a total loss.
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C. If a repair or replacement results in better than like kind or quality, we will not pay for the
amount of the betterment.
Comment: PAP pays on an ACV basis.
In my experience, stated amount comes up almost exclusively when dealing with older
cars. In the ISO Manual, Rule 19, two types of autos are described as being eligible for
the stated amount endorsement PP 03 08: antique autos and classic autos. This is
how Rule 19 describes each.
Antique Autos: An antique auto is a motor vehicle of the private passenger type which is 25 or
more years old and is maintained primarily for use in exhibitions, club activities, parades and
other functions of public interest, and occasionally used for other purposes.
Classic Autos: A classic auto is a motor vehicle of the private passenger type which is 10 or
more years old and may be used on a regular basis. Its value is significantly higher than the
average value of other autos of the same make and model year.
Here‟s an example. Jill has a 1992 Corvette convertible, fully loaded, with about 95,000
miles. She is the original owner, and has maintained the car in mint condition. Cost
new was $45,145. She has never had the car appraised, but a few weeks ago, a friend
offered her $9,500 for it. She decides to insure it for that amount, and the producer (or
underwriter) attaches the stated amount endorsement PP 03 08, which unfortunately
carries the vague and unhelpful title “Coverage for Damage to Your Auto.”
If a physical damage claim occurs, here is how the stated amount endorsement works.
Excerpt [emphasis added]:
PP 03 08 06 94
LIMIT OF LIABILITY
A. Our limit of liability for loss will be the lesser of the:
1. Amount shown in the Schedule or in the Declarations.
2. Actual cash value of the stolen or damaged property; or
3. Amount necessary to repair or replace the property with other property of like kind and
quality.
B. An adjustment for depreciation and physical condition will be made in determining actual cash
value in the event of a total loss.
C. If a repair or replacement results in better than like kind or quality, we will not pay for the
amount of the betterment.
Here is how Edmund‟s values a 1992 Corvette like Jill‟s (I entered the data myself in
conjunction with research for this article):
Trade-In: $2,476
Private Party: $3,684
Dealer Retail: $5,732
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Even using the highest of the three figures as ACV, here is how they fit in to the stated
amount endorsement language:
A. Our limit of liability for loss will be the lesser of the:
1. Amount shown in the Schedule or in the Declarations. [$9,500]
2. Actual cash value of the stolen or damaged property; or [$5,732]
3. Amount necessary to repair or replace the property with other property of like kind and
quality. [Any amount up to $5,732]
Maximum payable is $5,732, irrespective of what “stated amount” is shown on the
endorsement‟s Schedule. It is important to note that the stated amount endorsement
includes the following statement:
NOTICE
The amount shown in the Schedule or in the Declarations is not necessarily the amount you
will receive at the time of loss or damage for the described property.
In addition, ISO Manual Rule 19 includes this reminder:
Note.
Coverage is not provided on an "agreed value" basis.
Since the stated amount endorsement will never pay Jill more than she would receive
under an ACV settlement with the unendorsed PAP, the obvious question is, “What
good is the endorsement?” My understanding is that it allows a perhaps reluctant
insurer to write the coverage on an older car. The issue for the insurer is that ACV is
not specifically defined in the PAP, and there is no dollar-figure representing ACV on
the Declarations page for Physical Damage. And because certain models of older cars
have a cash value or market value higher than most ordinary, non-collectible cars of a
similar age, determining ACV can sometimes be a sticky wicket. So the stated amount
endorsement is intended to set the insurer‟s maximum exposure.
As a sidebar note on ACV, sometimes it‟s a lot more than just a sticky wicket. At times,
it is like Area 51: everybody knows it exists, but there are lots of different ideas as to
what exactly it is.
To illustrate, a colleague of mine recently related his personal experience with ACV on
an older (and highly collectable) car. He bought a 1970 Buick Electra 225 new for
$4,000. It had the new 455 cubic-inch, 370-horsepower V8, with every available option.
In 1997, his daughter had a wreck with the car, and bent the frame (and he was bent
out of shape!). The car had less than 100,000 miles and was in pristine condition. And
being an insurance nerd, he had lots of pictures and other information to document the
car‟s condition. The Buick was insured on an unendorsed PAP. Similar 1970 Buicks
were then selling for over $20,000. The adjuster depreciated that value and settled the
claim for $16,000.
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The term “actual cash value” is not defined in the PAP. The myth about ACV is that it
always means “replacement cost minus depreciation.” Oceans of ink have been used in
writings about all the variations on what ACV might be in a certain situation. While the
PAP does not define ACV, it does reference “depreciation.” Referring back to the
beginning of this article, see the “Limit of Liability” excerpt from the unendorsed PAP:
B. An adjustment for depreciation and physical condition will be made in determining actual cash
value in the event of a total loss
In the Buick claim, the adjuster did indeed apply $4,000 depreciation to the loss, paying
the insured $16,000. Although the coverage was written on an ACV basis, agreed
value would probably have been much more advisable.
While ISO does not have an agreed amount endorsement, there are several specialty
auto markets that provide this important coverage for insureds who own classic or
antique autos. In underwriting agreed value coverage, an appraisal is often required,
just like for other agreed value coverages on items such as fine arts, etc. When the
insurer accepts the appraisal, the insurer has “agreed” to the value, and in the event of
a total loss, would have paid Jill $9,500 if she had insured the car for that amount.
Actually, recall that Jill came up with this figure based only on what a friend was willing
to offer her for the Corvette. I checked the Internet, and found several 1992 Corvette
convertibles for sale in the $16,000 - $17,000 range. (I wonder if her “friend” knew the
car‟s real value?!) An appraisal on her Corvette will allow Jill to obtain the amount of
coverage she needs to fully protect her investment, which could be almost double what
she thought it was worth.
Although agreed value is far preferable than stated amount for older cars, it does have a
couple of important caveats. First, not only is an appraisal usually needed, but the
underwriting is very tight. Second, the terms and conditions of many (maybe most)
agreed value policies greatly restrict the use of the car. Common requirements,
especially for cars over 25 years old (“antique cars”), often include that it be stored in an
enclosed structure, cannot be driven except under limited conditions and to specified
events, and only for a set number of miles per year. But many people are like Jill, who
loves driving her „Vette on weekends, with the top down and the wind in her hair. She
thinks of it more as a second car than a specialty vehicle (like the “good china”), to be
used only on limited occasions. Insureds need to fully understand the terms and
conditions of the insurer they are considering when purchasing agreed value coverage.
By the way, there is a lot of useful information on all this on the Internet, especially at
web sites for car collectors. This would probably give you a better understanding of the
specialty of insuring classic and antique autos.
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Business Auto Policy
As we did in the Personal Auto discussion above, we should examine how the
unendorsed BAP values an auto in a physical damage claim. Excerpt from the ISO
CA 00 01 03 10:
SECTION III – PHYSICAL DAMAGE COVERAGE
C. Limit Of Insurance
1. The most we will pay for "loss" in any one "accident" is the lesser of:
a. The actual cash value of the damaged or stolen property as of the time of the "loss"; or
b. The cost of repairing or replacing the damaged or stolen property with other property of like
kind and quality.
3. An adjustment for depreciation and physical condition will be made in determining actual cash
value in the event of a total "loss".
4. If a repair or replacement results in better than like kind or quality, we will not pay for the amount of
the betterment.
Comment: As in PAP, the BAP pays on an ACV basis.
Here‟s how the BAP stated amount endorsement (CA 99 28) reads [emphasis added]:
CA 99 28 03 10 – Stated Amount Insurance
Limit Of Insurance
1. The most we will pay for "loss" in any one "accident" is the least of the following amounts:
a. The actual cash value of the damaged or stolen property as of the time of the "loss";
b. The cost of repairing or replacing the damaged or stolen property with property of like
kind and quality; or
c. The Limit of Insurance shown in the Schedule.
2. An adjustment for depreciation and physical condition will be made in determining actual cash
value in the event of a total "loss".
3. If a repair or replacement results in better than like kind or quality, we will not pay for the
amount of the betterment.
As we saw with the PAP version, stated amount coverage in the BAP never pays more
than ACV. It is definitely not “agreed value,” any more than its PAP cousin is.
The use of stated amount in commercial auto isn‟t necessarily limited to classic or
antique autos, as is generally the case in PAP. Since the term “auto” in BAP includes “a
land motor vehicle, ‘trailer’ or semitrailer designed for travel on public roads,” covered
autos can run the gamut from private passenger vehicles to large truck-tractors, mobile
cranes, and so forth.
I checked with a few of my insurance-nerd buds about some real-world examples of
when stated amount is used in commercial auto situations. Here are two that are
representative of what I found out.
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(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 might be $70,000 (+/-)
Repair costs: (a) $50,000 (paid); (b) $75,000 (max payable $70,000)
Total loss: $70,000 (insured understands this risk, but will accept due to reduced
premium)
(2) Various accounts with large vehicles and attached equipment. Certain classes
of business often 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. In the PAP, there is are exclusions for certain
customizing equipment added to pickups and vans, and an endorsement is needed to
cover the added value. However, there is no such exclusion in the BAP. Physical
damage applies to “the covered auto or its equipment.” (There are exclusions for certain
electronic equipment.)
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, but will accept due to reduced
premium)
An alternative solution for risks such as this would be to insure the value of the basic
vehicle (chassis) on the BAP, and cover the added equipment under an inland marine
form. If at all possible, both coverages should be written with the same insurer. Lastly,
ISO does not have an agreed value endorsement in BAP.
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