Loss Settlement Amount: How it Works and Examples

What is Loss Settlement Amount?

Loss settlement amount is the amount of a property insurance settlement, whether real estate or personal property. The amount depends on the type of loss cost settlement option in the homeowner’s insurance policy.

How Loss Settlement Amount Works

The loss settlement amount is the funds paid by the insurance company to the homeowner for a homeowner’s insurance claim. Homeowners are typically required to carry insurance that will cover at least 80 percent of the replacement value of their house.

Key Takeaways

• Insurance companies offer three loss settlement options: agreed value, replacement cost value, and actual cost value.
• Replacement cost option usually has higher premiums compared to the actual cash value option.
• The agreed value option requires an independent appraiser to determine the value of the object being insured.

However, the loss settlement amount may be less if the 80 percent coinsurance requirement is not met.

Every homeowner’s insurance policy contains a loss-settlement provision that details how a claim will be paid. This provision applies to the replacement cost payment for both the dwelling and the personal property. The policy might have a recoverable depreciation clause to offset the value deterioration of the insured property.

Unfortunately, the provision may allow the insurance company to delay full payment of the claim by paying only the actual cash value of the loss and, in some instances, forego full payment altogether because the insured does not have sufficient funds to repair or replace.

A loss-settlement provision is part of every homeowner’s insurance policy, and it outlines how a claim will be paid out to the insured.

Examples of Loss Settlement Amount Options

The three loss settlement options are actual cash value, replacement cost, and agreed value. Actual cash value (ACV) usually carries cheaper premiums than replacement cost. For a car, ACV would be defined as "fair market value" or the cost for a new car minus depreciation.

For example, if a car was $20,000 brand new, and a policyholder totaled it after owning it for a few years, they would not get the full $20,000, but a lower amount, perhaps only $10,000 or even less depending on its age.

Replacement cost coverage is a superior option for homeowners. Although more expensive, it pays for the replacement of damaged property with property of a similar kind and condition, up to the policy limits.

The agreed value option is typically reserved for unique or high-worth items where the value cannot be easily assessed. For example, if you are insuring a rare coin or an expensive painting, you and the insurance company will have to agree on the item’s worth at the time the policy is written. An independent appraisal often satisfies this requirement.