Insurance: Are You Really Covered? Part 3

This is the final installment of a series on buying insurance for fire apparatus and other emergency vehicles. The previous installments covered topics that included "totaling" a vehicle, depreciation, indemnification, and replacement cost value and...


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This is the final installment of a series on buying insurance for fire apparatus and other emergency vehicles. The previous installments covered topics that included "totaling" a vehicle, depreciation, indemnification, and replacement cost value and actual cash value coverage. This column focuses on another type of coverage.

Several insurance companies that cater to fire-rescue organizations have tried to find better ways to insure apparatus. These companies have revised policy wording for replacement cost value insurance to eliminate some of the problems encountered with replacement cost value insurance. This new type of coverage is called "agreed value," "agreed amount," "stated value" or something else.

With agreed value coverage, the policy will list each vehicle and show a "value" or "limit" that applies to it. Your insurance agent should meet with you at least once a year and ask whether you want to increase or decrease the amount of insurance on any vehicle.

Before you can intelligently answer the question, "Does your department want to increase or decrease the coverage on a vehicle?" you need to understand how agreed value coverage works. Last month's column defined replacement cost value as the lesser of:

  1. The cost to repair the damaged vehicle; or
  2. The cost to replace the damaged vehicle with another vehicle of like kind and quality; or
  3. The amount actually spent to repair or replace the damaged vehicle.

Agreed value coverage is much the same, except parts 2 and 3 are changed to say:

  1. The cost to replace the damaged vehicle with a new vehicle of like kind and quality; or
  2. The agreed value (the amount) shown on the policy declarations.

These changes seem simple, but they have a profound effect on how a claim is settled. For example, let's say your department bought a new Class A pumper in 1985 for $300,000 and its 1999 replacement cost is $400,000. If you wreck this vehicle and have replacement cost value insurance, the insurance company could spend $300,000 or $350,000 repairing it just to save itself from spending $400,000 on a new apparatus. The repairs could take months! (This kind of scenario acted as a catalyst for this series.)

With agreed value coverage, you have the option of selecting a more reasonable value. If you listed this vehicle on your policy for $200,000, then as soon as the insurance company determines repairs will cost more than $200,000, the negotiations are finished. The insurance company owes you $200,000. Why? Because it must pay you the LESSER of parts 1, 2 or 3. We already know that parts 1 and 2 are both more than $200,000, so the company owes you under part 3!

With agreed value coverage, your department and the insurance adjuster can probably figure out within days of the crash whether repairs would cost more than the agreed value on the policy. If yes, the adjuster can agree to pay the claim right away for the full agreed value. Then you can start shopping for a new or used apparatus - or you can just take the money and not do anything with it. There are no strings requiring you to actually replace the damaged pumper. Part of the deal, of course, is that the insurance company takes title to the wreck and can sell it to recoup part of its payment.

When deciding what agreed value to assign to each vehicle, you have to think about what your department would do if the vehicle were to be severely damaged in a wreck.

Let's say your department has three engines. Engine 1 is a 1973 model that cost $200,000 new, Engine 2 is a 1985 model that cost $300,000 new and Engine 3 is a 1998 model that you just bought for $400,000. You already know that to replace any of the three engines would cost upwards of $400,000 because that is how much the 1998 model cost. (If you don't know today's cost for a new version of one of your vehicles, you need to find that out right away.) Obviously, you will want an agreed value on the 1998 model of at least $400,000 - that's what it's worth. But what about the 1973 and 1985 engines?

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