What is a key reason for conducting an appraisal when establishing an agreed value policy?

When establishing an agreed value policy, conducting an appraisal serves the important purpose of accurately determining the replacement value needed for the insured property. This value reflects what it would cost to replace the property with a similar one at current market prices. By having this assessment, both the insurer and the insured have a clear understanding of the value that will be agreed upon, which helps avoid disputes in the event of a loss.

In an agreed value policy, the insured amount is predetermined and agreed upon, which is particularly useful in cases where property values may fluctuate. The appraisal establishes a solid foundation for this agreed value, ensuring that the coverage adequately reflects the true value of the property at the time the policy is written. This process ultimately protects both parties by ensuring that there is sufficient insurance coverage and that the premium reflects the correct risk associated with the property's value.