what is a valuation clause 
the term valuation clause refers to a provision in some insurance policies that specifies the amount of money the policyholder will receive from the insurance provider if a covered hazard event occurs this clause stipulates a fixed amount to be paid in the event of a loss for an insured property there are several types of valuation clauses that can be written into a policy including actual cash value and replacement cost among others understanding valuation clausesas noted above valuation clauses are insurance policy provisions they are written into insurance contracts and state the amount the insurer reimburses to the insured party in the event of a loss of property valuation clauses are based on an array of different factors about the specific property and individual budget requirements determining the cost of articles covered by insurance is an essential but time consuming step in getting insurance coverage by understanding how much an item is worth the policyholder is better able to determine the level of coverage they require policyholders should also determine their coverage based on maximum foreseeable loss insurance providers may also require a review by an appraiser or specialist to determine the value of a property before underwriting this requirement is particularly true in cases where the policyholder gets insurance coverage for classic antique customized and one of a kind property as well as for historic structures or items an appraisal may be required if a policyholder tries to get insurance in a dollar amount that exceeds the assessed value of a property there are several key factors that policyholders should be aware of when it comes to the valuation clauses associated with their insurance policies for instance keep in mind that values that do not keep up with the reasonable cost of living inflation or changes to the local building code cost increases may not adequately protect the policyholder in some cases the insurance provider may expect the insured to periodically update the value of items covered in the policy using a full reporting clause special considerationsvaluation clauses are also common outside the insurance industry as such they are used in contracts to highlight the value of assets for instance corporations may put valuation clauses in the contract for mergers and acquisitions m a in other cases these clauses may be used in distribution or licensing agreements between two companies types of valuation clausestwo of the most common types of valuation clauses are the actual cash valuation clause and the replacement cost valuation clause there are other types as well all of which are discussed in more detail below the actual cash valuation clause or actual cash value acv is the most frequently used method to calculate property benefit values in a homeowners policy this value is based on the cost of repairing or replacing a piece of property such as a boat a car or a home to its pre loss status the insurer factors the depreciation of the property into its value depreciation determines how much of an asset s useful lifespan value remains and will impact the benefit value due to the policyholder in the case of a covered loss another consideration of an acv policy is the valued policy law vpl arkansas california florida georgia kansas louisiana massachusetts minnesota mississippi missouri montana nebraska new hampshire north carolina north dakota ohio south carolina south dakota tennessee texas west virginia wisconsin and wyoming all have valued policy laws 1under this regulation insurance providers must pay the full listed face value of a policy in the event of a total loss without consideration of the depreciated actual cash value the law requires the payment of the full face value of the policy even if the value at the time of loss is a lower dollar amount however in some situations where there is concurrent causation for damage the insurer may issue a reduced payment the replacement cost is the amount necessary to repair or replace a piece of property to the same or equal level of quality as the original property these costs may change as the prices in the marketplace change depreciation of the property is not a consideration in replacement cost coverage however unless a policy also contains a law and ordinance provision it may not include enough coverage to satisfy all the costs of rebuilding a property the law and ordinance clause increases the replacement benefit amount by a percentage to allow for changes to the state building code this provision becomes crucial in the case of a covered hazard that destroys the property to 50 or more most local building codes will require structures that receive damages totaling 50 or more of the home s insured value to be demolished and rebuilt to current codes policyholders must understand that coverage only applies to the damaged portion of a structure the following are some other less common types of valuation clauses example of valuation clauseshere s an example of how valuation clauses work let s say a driver takes out a policy with abc insurance on their new car the car insurance company puts a provision into the policy indicating the amount it will reimburse the driver if the car is totaled in a no fault accident the company may introduce an actual cash value which is the total value less depreciation 