Overview
The Valued Policy Law (VPL) is established through state legislation that mandates insurance companies to pay the face amount of the insurance policy to the insured in cases where there is a total loss of a residential property. This payout approach differs from standard practices where compensation is usually based on the actual cash value of the property at the time of loss.
Key Points
Definition: Valued Policy Law requires that in the event of a total loss of a dwelling, the insurance company must pay the listed face amount (policy limit) of the insurance policy, rather than calculating compensation based on the diminished actual cash value.
Purpose: This law aims to provide clear, unambiguous compensation amounts to policyholders, ensuring that financial recovery is more straightforward in devastating situations, such as after a major fire or natural disaster. It avoids disputes over the valuation of lost property.
Application: Each state in the US may have its forms of VPL, and the specifics can vary. Homeowners should verify the existence and details of these laws in their state to fully understand their coverage rights and obligations.
Implications of Indemnity Principle: Though this law seems to contravene the principle of indemnity—which states that policies should not profit the insured but aim to restore them to their financial situation prior to the loss—it is legally approved as an exception to address the peculiar hardship posed by complete destruction of a home.
Example
For instance, if a residential property insured for $200,000 suffers a total loss due to an uncontrollable event covered under a homeowner’s policy, and if the state’s valued policy law applies, the homeowner would receive $200,000, regardless of the property’s actual cash value at the time of the loss.
References
- National Association of Insurance Commissioners (NAIC)
- Relevant state statutes and legislative documents for specific versions and applications of Valued Policy Laws.
Understanding your state’s valued policy law is crucial and can significantly influence the financial outcomes of insurance policies covering total property losses.
