With most commercial property policies, the insured will not be paid more than the replacement cost or actual cash value of the covered property, depending on the claim made and how the policy is written. The value of the property is determined at the time of the claim. In many states, though, valued policy laws apply.
Under valued policy laws, the value of the property is determined at the time that the policy is written, and if there is a total loss to the property, the limit of insurance is paid. This is the case even if the terms of the policy provide for a payment that is less than the limit of insurance. These laws were enacted to ensure that an insurer will not over-insure property, thereby collecting a premium on policy limits that the insured would never collect. Another advantage of such laws is that the insured does not have to prove the value of the property subject to the valued policy law, which is a task that is often difficult when there is a total loss.
State Differences in Valued Policy Laws
State laws vary in several ways, including the following.
The Type of Property to Which the Law Applies
Valued policy laws typically apply only to real property, but what kind of real property? Nebraska's valued policy law,1 for example, applies to any real property in the state, while Georgia's law2 applies only to one- or two-family dwellings owned by natural persons or a legal entity owned solely by natural persons. In addition, many valued policy laws don't apply if the coverage is written on a builders risk form or if coverage is written with a blanket limit.
The Causes of Loss to Which the Law Applies
All valued policy laws apply to loss by fire, and in some states, fire is the only cause of loss to which the law applies. That is not always the case, though. Kansas's valued policy law,3 for example, applies to loss by fire, tornado, windstorm, or lightning, while Wisconsin's law4 applies to loss by any covered peril.
What Is a Total Loss?
Another important difference among states is the focus of this article: What constitutes a total loss? Most statutes do not include a definition of this term, so it is left to the courts to decide what it means. While many think of a total loss as an obliteration of the property, most states do not require this level of damage. There are three main tests used to determine whether a total loss has occurred: the identity test, the restoration to use test (also known as the prudent person test), and the absence of value test.
Identity Test
Using the identity test, a building is a total loss if it loses its identity and specific character. Even if some parts of the building remain standing or are usable for another purpose, the loss is considered a total loss.
A Florida court described the identity test this way:
The building has lost its identity and specific character as a building, and becomes so far disintegrated, it cannot be possibly designated as a building, although some part of it may remain standing. It matters not that some debris remains which may be useful or valuable for some purposes. A policy of insurance upon a building is an insurance upon the building as such, and not upon the material of which it is composed.
Source:
Lafayette Fire Ins. Co. v. Camnitz,
149 So. 653,111 Fla. 556 (1933).
Restoration to Use/Prudent Person Test
This test asks whether a reasonably prudent uninsured owner would use the property that remains after a loss to restore the building to its original condition. If there is a substantial, usable remnant of a building that can be repaired or reconstructed, the loss is not a total loss.
Absence of Value Test
This third, less commonly used, test compares the cost to repair the damaged property to the value of the property. If it costs more to repair than to replace the property, the property is considered a total loss.
Combination of Tests
These tests are not mutually exclusive. Courts in some states have used a combination of these tests to determine whether damage to a particular property should be considered a total loss.
The Ordinance or Law Connection
Property insurance policies typically exclude ordinance or law exposures. As an example, the Causes of Loss—Special Form (CP 10 30 09 17) from Insurance Services Office, Inc., excludes the following, "regardless of any other cause or event that contributes concurrently or in any sequence to the loss."
a. Ordinance or Law
The enforcement of or compliance with any ordinance or law:
(1) Regulating the construction, use or repair of any property; or
(2) Requiring the tearing down of any property, including the cost of removing its debris.
In the case of a significantly damaged building, building codes may not allow the building to be repaired. Instead, if the owner wishes to rebuild, they must tear down the undamaged parts of the building and rebuild from the ground up.
To provide coverage for this exposure, ordinance or law coverage is often added to property policies. Three separate coverages are commonly included.
Coverage A, "Coverage for Loss to the Undamaged Portion of the Building," pays for the value of the undamaged portion of the building that must be demolished.
Coverage B, "Demolition Cost Coverage," pays the cost to demolish the undamaged portion of the building and clear the site of that debris.
Coverage C, "Increased Cost of Construction Coverage," pays additional costs to rebuild differently to satisfy current building codes.
Even without ordinance or law coverage, though, an insured with property in a valued policy law state may recover the policy limit even if building codes require destruction of the standing parts of the building.
Consider this case from Missouri, Stahlberg v. Travelers Indem. Co.,
568 S.W.2d 79 (Mo. Ct. App. 1978). The insured's building was partially destroyed by fire, which is a covered cause of loss. The codes in the jurisdiction required that a building that is 60 percent destroyed cannot be repaired and must be torn down.
The insurer paid only for the value of the fire-damaged portion of the building, citing the ordinance or law exclusion as a reason for not paying the full policy limit. The trial court agreed that the insured did not suffer a total loss and that the Missouri valued policy law did not apply. The appellate court reversed the decision, though, ruling that the insured suffered a constructive total loss due to the covered peril of fire. The concept of constructive total loss was described by the court as follows.
There is a total loss by fire if the building is so damaged that no substantial remnant remains that a prudent uninsured person would use on rebuilding.… An extension of the doctrine of constructive total loss is at issue in the present case. The general rule is that if repair or reconstruction of a building damaged by fire is prohibited by municipal authorities acting under proper authority of law, recovery may be had by the insured as for a total loss; this is a total fire loss by operation of law.
The court used the demolition order as evidence that the insured sustained a total loss caused by fire. It ruled that the ordinance or law exclusion is contrary to the valued policy statute and is void as it attempts to limit the liability of the insurer to less than the face value of the policy.
Does this mean that an insured with a building in a valued policy law state can forgo purchase of ordinance or law coverage? Absolutely not! The building may be damaged by a peril not addressed by the valued policy law. And, even a partial loss to a building can result in situations where ordinance or law coverage is needed. Also consider that, although most valued policy law states consider constructive total loss to be a total loss, some jurisdictions will approach the issue differently.
In a Wisconsin case, Distinguished Multiplying Bldgs. (D.M.B.), LLC v. Germantown Mut. Ins. Co.,
No. 2023AP1717, 2025 WI App 34 (Apr. 22, 2025), for example, fire damaged the insured's apartment building, and the city ordered the building to be razed as the cost to repair the building exceeded 50 percent of the building's assessed value. As was argued in the Missouri case above, the insured claimed that the damage constituted a constructive total loss caused by the covered peril of fire. The Wisconsin court, though, reached a different conclusion. It ruled that the fire and demolition order were independent causes of loss, and the ordinance or law exclusion applied. The building was not considered a total loss, and the valued policy loss did not apply.
What If There Are Multiple Causes of Loss?
When a valued policy law applies, the policy limit is considered to be the true value of the property and is paid to the insured. What if multiple causes of loss, though, cause damage, and only some of them are covered? This is often the case in a hurricane, for example, where damage may be caused by wind (typically covered under a property policy) and flood (typically excluded under a property policy).
Florida's current valued policy law5 is an example of one that addresses this scenario. It states as follows.
(a) In the event of the total loss of any building … the insurer's liability under the policy for such total loss, if caused by a covered peril, shall be in the amount of money for which such property was so insured as specified in the policy.…
(b) … when a loss was caused in part by a covered peril and in part by a noncovered peril, paragraph (a) does not apply. In such circumstances, the insurer's liability under this section shall be limited to the amount of the loss caused by the covered peril. However, if the covered perils alone would have caused the total loss, paragraph (a) shall apply.
It is interesting to note that Florida's valued policy law was changed in 2005 with respect to this issue after litigation following Hurricane Irene. In one Florida case, Mierzwa v. Florida Windstorm Underwriting Ass'n,
877 So. 2d 774 (Fla. Dist. Ct. App. 2004), involving a damaged home, the building was damaged by wind and water and was ultimately condemned and demolished. The insurer providing wind coverage argued that it was only responsible for paying for the damage caused by wind in spite of the state's valued policy law. The Florida appellate court ruled that, if the insurer has any liability for even a fractional share of the total damage, it is liable for policy limits pursuant to the valued policy law.
What If the Property Has Depreciated in Value Since the Policy Inception?
If the property has depreciated in value between the inception of the policy and the date of the loss, does the insurer still need to pay the policy limit, or can the amount of depreciation be deducted? This could happen in a situation where there is unrepaired damage to the building, followed by a total loss. Here again, states take different positions on this question.
Georgia's valued policy law6 specifically addresses the issue, allowing the insurer to deduct from the policy limit depreciation that occurs after the policy inception.
The amount of insurance set forth in the policy relative to the building or structure shall be taken conclusively to be the value of the property, except to the extent of any depreciation in value occurring between the date of the policy or its renewal and the loss, provided that, if loss occurs within 30 days of the original effective date of the policy, the insured shall be entitled to the actual loss sustained not exceeding the sum insured.
In a Minnesota case, Shaw v. Farm Bureau Prop. Cas. Ins. Co.,
23 F.4th 1043 (8th Cir. 2022), the insured suffered a fire loss to part of their home in the amount of nearly $160,000. The insurer paid for these damages, and before the building was repaired, a second fire destroyed the property completely. The building was insured for $268,800. For the second loss, the insurer paid the difference between these two numbers. The court ruled that the insured was entitled to be paid $268,800 for the second claim under Minnesota's valued policy law.
Conclusion
Understanding how valued policy laws operate is more than simply knowing that the limit of insurance is paid in the event of a total loss. What constitutes a total loss to which the law applies is a complex issue with varying answers depending on the jurisdiction and circumstances surrounding the loss.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
With most commercial property policies, the insured will not be paid more than the replacement cost or actual cash value of the covered property, depending on the claim made and how the policy is written. The value of the property is determined at the time of the claim. In many states, though, valued policy laws apply.
Under valued policy laws, the value of the property is determined at the time that the policy is written, and if there is a total loss to the property, the limit of insurance is paid. This is the case even if the terms of the policy provide for a payment that is less than the limit of insurance. These laws were enacted to ensure that an insurer will not over-insure property, thereby collecting a premium on policy limits that the insured would never collect. Another advantage of such laws is that the insured does not have to prove the value of the property subject to the valued policy law, which is a task that is often difficult when there is a total loss.
State Differences in Valued Policy Laws
State laws vary in several ways, including the following.
The Type of Property to Which the Law Applies
Valued policy laws typically apply only to real property, but what kind of real property? Nebraska's valued policy law, 1 for example, applies to any real property in the state, while Georgia's law 2 applies only to one- or two-family dwellings owned by natural persons or a legal entity owned solely by natural persons. In addition, many valued policy laws don't apply if the coverage is written on a builders risk form or if coverage is written with a blanket limit.
The Causes of Loss to Which the Law Applies
All valued policy laws apply to loss by fire, and in some states, fire is the only cause of loss to which the law applies. That is not always the case, though. Kansas's valued policy law, 3 for example, applies to loss by fire, tornado, windstorm, or lightning, while Wisconsin's law 4 applies to loss by any covered peril.
What Is a Total Loss?
Another important difference among states is the focus of this article: What constitutes a total loss? Most statutes do not include a definition of this term, so it is left to the courts to decide what it means. While many think of a total loss as an obliteration of the property, most states do not require this level of damage. There are three main tests used to determine whether a total loss has occurred: the identity test, the restoration to use test (also known as the prudent person test), and the absence of value test.
Identity Test
Using the identity test, a building is a total loss if it loses its identity and specific character. Even if some parts of the building remain standing or are usable for another purpose, the loss is considered a total loss.
A Florida court described the identity test this way:
Restoration to Use/Prudent Person Test
This test asks whether a reasonably prudent uninsured owner would use the property that remains after a loss to restore the building to its original condition. If there is a substantial, usable remnant of a building that can be repaired or reconstructed, the loss is not a total loss.
Absence of Value Test
This third, less commonly used, test compares the cost to repair the damaged property to the value of the property. If it costs more to repair than to replace the property, the property is considered a total loss.
Combination of Tests
These tests are not mutually exclusive. Courts in some states have used a combination of these tests to determine whether damage to a particular property should be considered a total loss.
The Ordinance or Law Connection
Property insurance policies typically exclude ordinance or law exposures. As an example, the Causes of Loss—Special Form (CP 10 30 09 17) from Insurance Services Office, Inc., excludes the following, "regardless of any other cause or event that contributes concurrently or in any sequence to the loss."
In the case of a significantly damaged building, building codes may not allow the building to be repaired. Instead, if the owner wishes to rebuild, they must tear down the undamaged parts of the building and rebuild from the ground up.
To provide coverage for this exposure, ordinance or law coverage is often added to property policies. Three separate coverages are commonly included.
Even without ordinance or law coverage, though, an insured with property in a valued policy law state may recover the policy limit even if building codes require destruction of the standing parts of the building.
Consider this case from Missouri, Stahlberg v. Travelers Indem. Co., 568 S.W.2d 79 (Mo. Ct. App. 1978). The insured's building was partially destroyed by fire, which is a covered cause of loss. The codes in the jurisdiction required that a building that is 60 percent destroyed cannot be repaired and must be torn down.
The insurer paid only for the value of the fire-damaged portion of the building, citing the ordinance or law exclusion as a reason for not paying the full policy limit. The trial court agreed that the insured did not suffer a total loss and that the Missouri valued policy law did not apply. The appellate court reversed the decision, though, ruling that the insured suffered a constructive total loss due to the covered peril of fire. The concept of constructive total loss was described by the court as follows.
The court used the demolition order as evidence that the insured sustained a total loss caused by fire. It ruled that the ordinance or law exclusion is contrary to the valued policy statute and is void as it attempts to limit the liability of the insurer to less than the face value of the policy.
Does this mean that an insured with a building in a valued policy law state can forgo purchase of ordinance or law coverage? Absolutely not! The building may be damaged by a peril not addressed by the valued policy law. And, even a partial loss to a building can result in situations where ordinance or law coverage is needed. Also consider that, although most valued policy law states consider constructive total loss to be a total loss, some jurisdictions will approach the issue differently.
In a Wisconsin case, Distinguished Multiplying Bldgs. (D.M.B.), LLC v. Germantown Mut. Ins. Co., No. 2023AP1717, 2025 WI App 34 (Apr. 22, 2025), for example, fire damaged the insured's apartment building, and the city ordered the building to be razed as the cost to repair the building exceeded 50 percent of the building's assessed value. As was argued in the Missouri case above, the insured claimed that the damage constituted a constructive total loss caused by the covered peril of fire. The Wisconsin court, though, reached a different conclusion. It ruled that the fire and demolition order were independent causes of loss, and the ordinance or law exclusion applied. The building was not considered a total loss, and the valued policy loss did not apply.
What If There Are Multiple Causes of Loss?
When a valued policy law applies, the policy limit is considered to be the true value of the property and is paid to the insured. What if multiple causes of loss, though, cause damage, and only some of them are covered? This is often the case in a hurricane, for example, where damage may be caused by wind (typically covered under a property policy) and flood (typically excluded under a property policy).
Florida's current valued policy law 5 is an example of one that addresses this scenario. It states as follows.
It is interesting to note that Florida's valued policy law was changed in 2005 with respect to this issue after litigation following Hurricane Irene. In one Florida case, Mierzwa v. Florida Windstorm Underwriting Ass'n, 877 So. 2d 774 (Fla. Dist. Ct. App. 2004), involving a damaged home, the building was damaged by wind and water and was ultimately condemned and demolished. The insurer providing wind coverage argued that it was only responsible for paying for the damage caused by wind in spite of the state's valued policy law. The Florida appellate court ruled that, if the insurer has any liability for even a fractional share of the total damage, it is liable for policy limits pursuant to the valued policy law.
What If the Property Has Depreciated in Value Since the Policy Inception?
If the property has depreciated in value between the inception of the policy and the date of the loss, does the insurer still need to pay the policy limit, or can the amount of depreciation be deducted? This could happen in a situation where there is unrepaired damage to the building, followed by a total loss. Here again, states take different positions on this question.
Georgia's valued policy law 6 specifically addresses the issue, allowing the insurer to deduct from the policy limit depreciation that occurs after the policy inception.
Conclusion
Understanding how valued policy laws operate is more than simply knowing that the limit of insurance is paid in the event of a total loss. What constitutes a total loss to which the law applies is a complex issue with varying answers depending on the jurisdiction and circumstances surrounding the loss.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.