What's the Difference Between Actual Cash Value and Agreed Value?
When buying boat insurance you might come across a policy that says it’s ‘Actual Cash Value’ or ‘Agreed Value’ – but what do these terms mean other than a difference of a few hundred (or sometimes more!) dollars a year in premium?
Actual Cash Value Insurance Policies
Actual Cash Value policies tend to be a lot cheaper so they can be very attractive for owners looking for a more economic alternative – but they also offer less coverage than other policies in exchange for the decrease in premium.
The Actual Cash Value of your boat is defined as the replacement cost of your vessel minus depreciation for age and condition. This means that the value your boat is insured for is not necessarily the amount you’ll get if something were to happen – and there’s no way to know exactly how much your value will be depreciated until after a loss happens. With an Actual Cash Value policy you might end up paying several thousand dollars to repair depreciated parts after a partial loss or even tens of thousands of dollars to replace your boat in a total loss to make up the shortfall.
As an example, take a boat that is 15 years old which would sell brand-new for $300,000. The insurance company determines that the ‘expected life’ of this type of boat would be 20 years. If that 15 year old boat had a total loss the insurance company would calculate the boat was worth by using the formula:
Actual Cash Value = Replacement Cost * (expected life – current life) / expected life
For this case the Actual Cash Value would be $300,000 * (20 – 15) / 20 or $75,000. Even if an identical vessel were selling for far more than this amount $75,000 is the most that the insurance company would pay.
This is fine if you understand the risk and you’re fine with having to pay more than just your deductible for repairs or replacement in exchange for the lower premium – but in the long run it’s often more cost-effective to just get an Agreed Value policy and pay the extra premium to avoid the uncertainty.
Agreed Value Insurance Policies
Agreed Value policies are more expensive than Actual Cash Value policies in exchange for better protection for your investment. For this type of policy the value of the boat is ‘agreed’ upon between you and the underwriter and this value is the amount you will receive if you have a total loss. Normally the value that is ‘agreed’ will be your purchase price or the market value on your most recent marine survey.
Since your survey is the basis on which the insurer decides how much your boat is worth it is extremely important to make sure it is up to date and done by a qualified and accredited surveyor.
Agreed Value policies offer peace of mind because the limit that is on your policy is the amount that you are insured for after a loss. Parts are replaced new-for-old without depreciation so the only amount you pay is your deductible. Some items which are more prone to wear-and-tear such as canvas and sails) may be subject to depreciation – but if this is the case it will be clearly spelled out in your contract. Some insurers will offer Agreed Value policies for newer boats and convert the insurance to an Actual Cash Value basis after the boat hits a certain age. It is important to speak with your broker to ensure your Agreed Value policy will stay Agreed Value as your vessel ages.
Replacement Cost Insurance Policies
Replacement Cost policies are only available for new boats (normally 3 years and under) and offer the highest amount of protection. Under a replacement cost policy if your boat is a total loss the insurance company will replace your boat with a boat of the same (or similar) make and model even if the cost to do so is greater than the amount you are insured for.
So, if you bought your boat for $70,000 last year but now the only similar boats on the market are going to $90,000 your insurer will purchase the $90,000 boat as a replacement for your $70,000 boat. If you choose not to replace your boat and go with a cash settlement the insurer will give you the amount of insurance on your policy (in this case $70,000).
The exact definition of replacement cost can vary from insurer to insurer. Some require that you are the first owner of the boat and others that you insure to the full invoice amount. Others will replace your boat with a brand new model year. If you can get replacement cost insurance on your boat it’s best to check with your broker to make sure you know exactly what happens if you have a loss.
So what type of policy should I get?
We always recommend that you at the minimum get an Agreed Value policy. This ensures there are no surprises or reductions in coverage if you have a claim. If you’re more concerned about cost than coverage an Actual Cash Value policy might be for you – just understand that the lower price means lower coverage and don’t be surprised if you’re paying out more than just your deductible after a loss.