Buyers of goods under finance, such as vehicles, can secure coverage with Market Value or Agreed Value insurance policies - agreed may be above market value. It is important for buyers to closely consider this aspect of their policy as it represents the amount paid out by the insurance in the event the goods are stolen or written off. When goods are purchased with finance, lenders require the goods used as the loan collateral to be fully insured. This is the lender’s assurance that they will be able to recoup the funds loaned in the event that the borrower defaults on the loan.
A wide range of business insurance policies may be arranged with either an agreed value or at the market value of the goods. One of the biggest markets for this to be considered is with car insurance when taking out a Comprehensive Motor Vehicle policy.
The difference between the two policies is the amount covered by the policy. Agreed Value is the amount that is agreed to between the insurer and the policy holder. The Market Value is determined by the insurer based on the value of the goods in the market for that make and model. Agreed value may be above the market value. The higher the value of the policy, the higher the premium.
In deciding which is the most suitable policy for their goods and circumstances, policy holders should consider if the amount they would receive from the insurer in the event a claim is made, would cover their commitments. These may include paying out the finance and purchasing a vehicle to replace the damaged one.
Insurers also look at the cost of repairing vehicles when insurance policies are quoted. Different makes and models have varying costs of parts and repairs. Insurers take this into account in addition to the vehicle’s value or price.
As the motor vehicle market is one of the largest, we’ll focus on car insurance in this explainer. But the same concepts may apply to comprehensive policies on other assets such as trucks, equipment and machinery.
What is an Agreed Value Insurance Policy?
Insurers often refer to an agreed value policy as the guaranteed value. With this type of policy, the owner of the goods and the insurer together must arrive at the value for the policy. This will represent how much the owner will receive from the insurer in the event that the vehicle is written off in an accident or stolen. The value appears on the Certificate of Insurance.
The amount valued may be the cost of replacing the car and finalising any finance payments outstanding at the time. This may mean that any value agreed to could be the market value in addition to a further amount. When an amount is agreed to, the owner has the assurance or guarantee, of how much they will receive from the insurer when a claim is made. As the value is typically higher than market value, this type of policy would attract higher premiums.
In return for paying a higher premium, the owner has the assurance that they will be able to finalise all required costs should their vehicle be stolen or deemed a write-off. The lender will also want the assurance that the insurance is sufficient to cover the finance if required. After all, the vehicle is the collateral for the loan. Should the insurance not be sufficient to cover the finance costs, the owner may be required to pay any additional finance costs.
Many lenders will insist on an Agreed Value policy be taken out by the borrower, as opposed to a market value policy.
When a policy is due for the annual renewal, the value may be reviewed and altered if required. The vehicle would depreciate in value over time and the amount owed on the loan would also reduce with the monthly payments. Premiums would typically reduce over time. Lenders will require proof of policy renewal each year.
Conditions may be applied by insurers as to which makes and models are eligible for an agreed value policy.
What is a Market Value Car Insurance Policy?
As the name implies, this type of policy has a value in line with the what the market determines for that vehicle. The Certificate of Insurance does not show the market value. When a claim is made by a policy holder, the insurer determines the value of the payout based on the value of the vehicle in the current market.
The value is determined by the model, year, manufacturer, mileage, condition, any special attachments or accessories, and any specific features such as rarity or limited-edition. Most cars will diminish in value annually. Therefore, their market value also reduces as does the insurance policy premium.
What is the right insurance policy for your vehicle?
Vehicle buyers and owners should weigh up the benefits of the different policies to ensure they are happy with their cover. When buying a vehicle with finance – Lease, Chattel Mortgage, CHP, and using the vehicle as collateral, the lender may insist that the policy be at an Agreed Value. If unsecured finance is used for the purchase, the lender would not insist the vehicle be insured. It is the owner’s decision, and they may decide on a lower priced Market Value policy.
When calculating car finance using our calculator, buyers may add in the cost of the policy to determine their annual expenses for the vehicle. ed
When the finance on a vehicle is paid out and no further payments are owing, owners may choose what policy suits their requirements. Being mindful that should be the vehicle be integral to their business operation, having the vehicle insured can be a smart business decision.
Discuss if Market Value or Agreed Value Insurance is required on your vehicle when arranging your finance through Business.Finance 1300 000 033.
DISCLAIMER: THE SPECIFIC PURPOSE IN PROVIDING THIS ARTICLE IS FOR GENERAL INFORMATION ONLY. IT IS NOT INTENDED AS THE SOLE SOURCE OF FINANCIAL INFORMATION ON WHICH TO MAKE BUSINESS FINANCE DECISIONS. BUSINESS OWNERS WHO REQUIRE ADVICE OR GUIDANCE AROUND THEIR SPECIFIC FINANCIAL CIRCUMSTANCES ARE RECOMMENDED TO CONSULT WITH AN ADVISOR OR ACCOUNTANT. NO LIABILITY IS ACCEPTED IN REGARD TO ANY MISREPRESENTATIONS OR ANY ERRORS RE ANY DATA, SPECIFICS, POLICIES AND OTHER INFORMATION AS SOURCED FROM OTHERS
