Valued Policy Law

Valued policy laws exist in approximately 20 states and fundamentally alter the indemnity principle that underlies most property insurance. Under the standard indemnity approach, the insurer pays the actual loss sustained, which may be less than the policy limit. Under a valued policy law, if the insured property is totally destroyed by a covered peril, the insurer must pay the entire amount stated on the declarations page—even if the property's replacement cost or actual cash value is lower than the policy limit. The rationale is that the insurer accepted premiums based on the stated value and should not be permitted to dispute that value after a loss.

For apartment owners in valued policy law states, this statute provides important protection but also creates an incentive for both parties to establish accurate valuations upfront. If an apartment building is insured for $12 million under a valued policy law and suffers a total fire loss, the insurer pays $12 million regardless of whether the actual replacement cost is $10 million or $14 million. This eliminates disputes over building valuation after a loss and guarantees the owner receives the coverage they paid for. However, valued policy laws typically apply only to total losses—partial losses are still adjusted based on actual damage.

The application of valued policy laws varies significantly by state. Some states apply the law only to fire losses, while others extend it to all covered perils. Some states define total loss as complete physical destruction, while others include constructive total losses where repair costs exceed a specified percentage of the insured value. Apartment owners should consult with their insurance advisor to understand whether their state has a valued policy law, what perils and loss thresholds it covers, and how it interacts with co-insurance clauses and other policy provisions.