It’s football season and, despite the generous attempts of my friends to make me understand and enjoy the game, I have found that my brain is simply not wired for it. Instead of giving it one more shot this year, I’ve decided to think and write about insurance valuation issues on Chip’s blog. I will begin my series with a synopsis of the historical purpose of Valued Policy Laws (VPLs), to gradually develop a discussion on modern insurance valuation trends and disputes. Please join me over the next several Sundays to discuss these insurance topics of interest.
A valued policy is traditionally defined as “one in which the value of the property insured is agreed upon by the parties so that in the case of a total loss, it is not necessary to prove the actual value to recover under the policy.” 44 Am. Jur. 2d Insurance §1500 (2009). Valued policy laws, or the so-called “total loss” statutes, were first enacted in the United States in the late 1800s, principally as protective measures for insureds. According to the annals of insurance history, the first VPL emerged in Wisconsin in response to a business practice of some fire insurance companies which, acting through their agents, bound policies in excess the value of the property at higher premiums, but when a loss occurred, the carriers would scale down the loss payment to the point of actuarial health and safety, thus over-collecting premiums and underpaying losses.
The Wisconsin farmers of the time were not happy. They were promised more insurable value for their farms and crops and gladly paid the higher premiums to protect their investments, only to be surprised by savings and short-changing clauses and hard fights over the actual value of their properties. Underwriters could not have lived in better times, but the farmers rose up in the name of indemnity, and the Wisconsin legislature adopted a law where, absent proof of crime and in the case of a total loss, a carrier would be forced to pay the bargained face-value of the policy. Many states followed Wisconsin’s grassroots movement. The underwriters panicked. Carriers soon fine-tuned their appraisal and property valuation formulas to protect themselves from the not-so-scrupulous farmers who were waging war on their over-insured policies and intentionally causing their losses. If you are reading this, you probably know that in this business both sides are equally intolerant of windfalls.
Today, over a third of the States have VPLs in place. While the nuances may vary from state to state, their historical purpose — to liquidate the measure of the damages in the case of a total loss and protect the policyholder from protracted valuation disputes — remains unchanged. In its pure form, VPLs force carriers to adequately pre-determine the value of the insured property at the time the policy is issued. The stated value becomes non-negotiable in the event of a loss, and the carrier cannot dispute the bargained value. The protections of a VPL are generally triggered in the event of: 1) a total loss 2) caused by a covered peril. However, if it were that simple, I would probably be more interested in football.
Modern concerns such as uncontrolled urban sprawling, drastic property value fluctuations, and the impact of unprecedented natural catastrophes have complicated VPLs. This is not to say that VPLs are toothless tigers in today’s loss adjustment environment. In the case of a total loss caused by a single peril, the application should be fairly simple. The Wisconsin farmers, however, would cringe over the complexities of modern claims disputes in the event of losses caused by multiple perils. A policyholder can recover pursuant to a VPL depending if he or she lives in a jurisdiction that favors the indemnity (insured recovers the full value of the policy even though the risk is worth less than the face value) or an “insurable interest value” jurisdiction (insured recovers the value of the risk at the time of the loss, not to exceed the amount stated on the policy), if his contract is not plagued with anti-concurrent causation (damage excluded regardless of its concurrent causation with a covered loss) and pro-rata liability clauses (computes percentage of liability among co-insurers), and whether the stars are all aligned the right way.
Join me next week as I attempt to demystify Florida’s current Valued Policy Law. In the meantime, enjoy the game.