Agreed Value Clause: Definition and How It Works

The agreed value clause — also called the agreed amount clause or agreed value endorsement (ISO form CP 04 02 or its carrier equivalents) — is a commercial property insurance provision that suspends the policy's coinsurance clause by establishing a pre-agreed insured value for covered property. When a policy includes an agreed value clause, the insured and insurer formally agree at policy inception that the stated limit represents the full insurable value of the property. In the event of a total loss, the insurer pays the policy limit without reduction. More importantly, in the event of a partial loss, the insurer waives any coinsurance penalty calculation — the insured collects the full covered loss amount up to the policy limit regardless of whether that limit equals some percentage of the property's insurable value. The agreed value clause is the most effective mechanism for eliminating coinsurance penalty exposure on commercial property accounts.

How the Agreed Value Clause Differs from Standard Coinsurance

Under a standard ISO CP 00 10 commercial property form, a coinsurance clause — typically set at 80%, 90%, or 100% — requires the insured to carry a limit equal to at least that percentage of the property's insurable value at the time of loss. If the limit falls short, the insurer applies a proportional penalty to every partial loss. The formula is:

Claim payment = (Limit carried ÷ Required limit) × Loss amount − Deductible

A client who insures a $2,000,000 building for $1,200,000 against an 80% coinsurance requirement ($1,600,000 minimum) would collect only $637,500 on a $850,000 fire loss — a $212,500 reduction before the deductible. That shortfall comes entirely from the coinsurance penalty, not from the deductible or any coverage exclusion.

When an agreed value clause is attached, this calculation is bypassed entirely. The insurer accepts the limit as the agreed insurable value and pays covered partial losses in full up to that limit, period. The coinsurance formula does not apply.

The Statement of Values Requirement

Agreed value clauses do not eliminate the need for accurate valuations — they shift when that valuation work must happen. To bind an agreed value clause, the insured must submit a statement of values (SOV), also called a schedule of values, documenting the insurable value of each covered building and item of business personal property. The insurer reviews and accepts the SOV as the basis for the agreed limit.

The practical discipline of completing an SOV is valuable in itself: it forces the insured to quantify replacement costs using current labor and material prices rather than relying on outdated purchase prices, depreciated book values, or informal estimates. Carriers typically require the SOV to be updated at each renewal. If the insured declines to update the SOV and construction costs have increased materially since the last renewal, the agreed value clause may not protect against underinsurance at the next loss — the agreed limit may simply be inadequate.

Carriers that suspect the SOV is inaccurate may require an independent appraisal before agreeing to bind the clause. On complex commercial properties — manufacturing facilities, hotels, hospitals, mixed-use developments — appraisal is standard practice.

Agreed Value vs. Replacement Cost Value

The agreed value clause and replacement cost value (RCV) coverage address different policy mechanics and are frequently confused.

Agreed value clause: Governs how the limit is validated and whether the coinsurance penalty applies. It is a limit-adequacy protection mechanism.
RCV endorsement: Governs the settlement basis — whether the insurer will deduct depreciation from the claim payment. It is a claims-payment protection mechanism.

A policy can have one, both, or neither:

Agreed value + RCV: The insurer accepted the limit as accurate at inception (no coinsurance penalty) and will pay replacement cost without depreciation (no ACV haircut). This is the strongest commercial property coverage configuration.
Agreed value + ACV: No coinsurance penalty, but the insurer will deduct depreciation from claim payments. Common on older buildings where RCV coverage is declined.
Coinsurance + RCV: The insurer pays full replacement cost but will apply a coinsurance penalty if the limit is inadequate. The RCV benefit is undermined if the insured is simultaneously underinsured.
Coinsurance + ACV: The standard (and weakest) configuration — depreciation deducted, and a coinsurance penalty applied if the limit falls short.

Blanket Agreed Value vs. Per-Location Agreed Value

Agreed value clauses are written on two bases:

Per-location agreed value specifies a separate agreed value for each building or location listed on the policy. The coinsurance suspension and SOV are location-specific. This is typical for accounts with one to a handful of locations.

Blanket agreed value applies a single agreed value across multiple buildings or locations that are insured under a blanket limit — a single policy limit covering all locations combined rather than separate sublimits per site. Blanket agreed value is common on commercial real estate portfolios, retail chains, and multi-site manufacturers. The SOV must document all properties in aggregate, and the blanket limit must represent the combined insurable value of all covered locations. Blanket agreed value provides maximum flexibility because the insured does not need to precisely allocate limits among locations — a total loss at one site is covered up to the blanket limit regardless of how that site's value compares to its individual SOV line.

When the Agreed Value Clause Expires

Most agreed value clauses are written on a one-year term and expire at the policy anniversary unless renewed with a current SOV. If the clause lapses — typically because the renewal SOV was not submitted on time — the policy reverts to its standard coinsurance requirement retroactively from the renewal date. A loss occurring after the anniversary under a lapsed agreed value clause is subject to full coinsurance analysis. Brokers managing large commercial property accounts should calendar SOV renewal submission dates well before policy expiration to prevent inadvertent reinstatement of coinsurance exposure.

How Brokers Use the Agreed Value Clause

For commercial property accounts, agreed value is a standard coverage enhancement that brokers should request as a matter of routine, not an optional add-on to mention only when clients ask. Key broker applications:

New accounts: Run a replacement cost estimator (RSMeans, CoreLogic, e2Value, or carrier-provided tools) before binding to establish an SOV that will support agreed value at inception.

Renewals: Request an updated SOV from the insured and verify that limits have kept pace with construction cost inflation. A client whose limits are outdated is at risk of both inadequate coverage at a total loss and a coinsurance penalty at a partial loss.

Hard market accounts: When carriers restrict or surcharge agreed value on troubled classes (e.g., coastal commercial property, wood-frame habitational), advise the insured to obtain a certified appraisal to support the clause. Some carriers will grant agreed value only after a formal appraisal in these segments.

Builders risk: Agreed value provisions in builders risk insurance function similarly — the completed value of the project at the inception of the policy is established as the agreed insured value. Soft cost and delay-in-completion endorsements add their own valuation layers on top.

Related Terms

Coinsurance Clause — the policy condition that agreed value suspends
Replacement Cost Value — the settlement basis that pairs with agreed value for maximum protection
Actual Cash Value — the depreciated settlement basis that may apply even under agreed value policies
Builders Risk Insurance — agreed value provisions apply to construction projects as well
Per-occurrence limit — see per-occurrence limit in this glossary (plain text; not yet published)
Blanket limit — covers multiple locations under a single aggregate limit (plain text; not yet published)