What is an Agreed Amount Endorsement?

We’ve defined the difference between replacement cost and actual cash value, but to reiterate in a short sentence: The difference between the two is that actual cash value takes a deduction for depreciation. So what is an agreed amount endorsement? How does that fit into the big picture?

What Is an Agreed Amount Endorsement?

The definition of “Agreed Amount Endorsement” is this: “An endorsement to a policy made by the insurance company wherein it waives the coinsurance clause on the specified property. As long as this endorsement is in effect, there would be no coinsurance penalty at the time of a claim.”

Did you know? An agreed amount endorsement is often referred to as an “Agreed Value Clause” OR “Agreed Amount Clause”. An Agreed Amount Endorsement is fairly rare to see in policies, but it does come into play from time to time.

So What is a Coinsurance Clause?

To better understand an agreed amount endorsement, you need to understand the coinsurance clause. Coinsurance is the amount—typically in percentage form—of the value that the insured must pay if the property was insured for less than the amount of money the insurance company determines it was worth. The coinsurance clause applies to property insurance, not liability insurance.

Most commercial insurance policies set a coinsurance at 80 or 90%. What is the simple formula to determine the coinsurance? You take the amount that you insured the property for and divide it by the amount you should have insured it for, then multiply it by the amount of your loss.

Let’s use this example: You have an office that would cost $100,000 to replace. You have an 80% coinsurance clause which mandates that you need to insure the office for at least $80,000. Let’s say that you have a fire in your office, and you’ve only insured your property for $40,000. You suffer a $20,000 loss.

So we divide the $40,000 you insured the building for by $80,000 which is the actual value of the office. That equals 50%, which we now multiply by the amount of the loss, which is $20,000, which gives us a final amount of $10,000. This means the insurance will pay $10,000 minus any deductible you have, and you are responsible for the other $10,000 because you were paying premiums on property which was more expensive than you declared it to be.

The Bottom Line

This type of an endorsement in a commercial property insurance policy is rare because the insurer ends up paying the insure more than what the policy is supposed to cover. If you’ve been paying premiums for a policy with a $1,000,000 limit, but your property is worth $2,000,000—that clause means the insurer may have to pay well over the limits of the policy.

Because of its rarity—and that you’ll more often see a coinsurance clause in a policy—make sure you speak with your licensed insurance professional in order to ensure that you have a reasonable valuation on your property.