8.2 Agreed Value, First Loss and New-for-Old Policies

Section 8.1 established the strict measure of indemnity: the insured is restored to the position they occupied immediately before the loss, no better and no worse, with depreciation reflected. Learning outcome 9 then asks candidates to explain three policy bases that deliberately depart from that measure — agreed value policies, first loss policies and new for old cover — as well as the indemnity/benefit distinction. Each is an exception the market has developed because strict indemnity produces a bad practical answer in particular circumstances.

Agreed Value (Valued) Policies

An agreed value policy — also called a valued policy — fixes the amount payable for a total loss at inception. If the subject matter is totally lost, the insurer pays the agreed figure and does not require the insured to prove the value at the date of loss.

Why it exists. For some property, establishing value after the event is difficult, contentious or impossible. There is no reliable second-hand market for a 1930s racing car, a painting by a particular artist, or a bespoke piece of production machinery. Arguing about value at the worst possible moment helps neither party, so the parties agree it in advance.

How it works in practice.

• The insured obtains a professional valuation and the insurer agrees to it before cover incepts. The agreed figure is recorded in the schedule.
• On a total loss the insurer pays the agreed value, even if the market value has since fallen. Equally, the insured cannot claim more if the market value has risen.
• Partial losses are usually settled on ordinary repair-cost principles, not as a proportion of the agreed value, unless the policy says otherwise.
• Because the agreed figure is the measure, average does not apply to it: there is no underinsurance to test.
• Valuations are normally reviewed periodically — often annually or every three years — so that the agreed figure does not drift far from reality.

Typical classes: marine hull, fine art and antiques, classic and vintage vehicles, jewellery, specialist and irreplaceable plant.

Agreed value and benefit policies are not the same thing

Both pay a pre-set sum, but for different reasons.

First Loss Policies

A first loss policy is written with a sum insured deliberately set below the full value of the property at risk, because a total loss is practically impossible.

The classic case is theft cover on a very large warehouse. The building may hold £8 million of stock, but a thief cannot remove £8 million of goods in one night — the realistic maximum loss might be £400,000. Insuring the full £8 million against theft would waste premium on cover that could never be needed.

How it works.

• The insured and the insurer agree an estimated maximum loss (EML) and set the sum insured at that figure.
• The insurer pays claims in full up to that sum insured, without applying average, even though the sum insured is a fraction of the full value at risk.
• The insurer knows the full value and prices the first loss limit accordingly, so the premium is not simply proportionate to the reduced sum insured.
• The insured must still declare the full value at risk; a first loss policy is an agreed structure, not a way of concealing exposure.

The critical distinction from underinsurance. A first loss policy and an underinsured policy can look identical on paper — a sum insured below full value — but they are opposites:

New for Old (Reinstatement) Cover

New for old, or reinstatement, cover pays the cost of a new equivalent item, or of rebuilding as new, with no deduction for wear, tear or depreciation. It is the most common departure from strict indemnity in the modern market, and most household contents and buildings policies are written this way.

• Contents. A five-year-old television destroyed by fire is replaced with a new equivalent model, not with the depreciated value of a five-year-old set. As Section 8.1 explains, if the insured takes cash instead of the replacement, the insurer's payment is normally limited to what the replacement would have cost the insurer through its own supplier.
• Buildings. Reinstatement pays the cost of rebuilding as new, subject to the reinstatement conditions: the work must actually be carried out, generally within a reasonable time, and the sum insured must be adequate. If the insured chooses not to rebuild, the basis of settlement usually reverts to indemnity — market value — which can be dramatically lower.
• Common exclusions. Clothing, household linen and similar items are frequently excluded from new-for-old and settled on an indemnity (wear-and-tear) basis instead.
• Average still applies. Reinstatement cover does not disapply average. The sum insured must represent the full cost of rebuilding as new, and a sum insured based on market value or on a depreciated figure will trigger average at the moment of claim.

Betterment

Where repair unavoidably improves the property beyond its pre-loss condition, the insurer may seek a contribution for betterment. New-for-old cover is essentially betterment that has been paid for in the premium and written into the contract, which is why it is an exception rather than a breach of the principle.

Putting the Three Together

All three can leave the insured better off in money terms than immediately before the loss. That does not defeat the principle of indemnity: it is a commercial modification the parties have agreed and the insurer has priced. What the principle continues to prohibit is the insured profiting from the same loss twice, which is why subrogation and contribution (Sections 8.4 and 8.5) still apply to all three bases.