Walking around your local arts and crafts show one Sunday, you see a painting you like. Just a bunch of swirly colors and what looks like an out-of-focus disembodied goat head on one side. You buy it for $175.
Fast-forward 15 years. The goat-head artist becomes a major sensation. Your painting is now worth $6.7 million.
Unfortunately, around this time, your den catches fire and the painting is destroyed. You file an insurance claim. The insurance company wants to pay you $175 for the painting, since that’s what you paid for it originally.
Luckily, you have a market value clause. This stipulation says that the insurer must pay the market price of the property destroyed, rather than the amount you originally paid for it. In effect, the clause says the item is worth what it's worth now, not what you happened to pay for it way back when.
It comes up a lot in business insurance, especially manufacturers. For a living, these companies buy a bunch of raw materials and turn them into finished products. If those finished products get destroyed, the manufacturer doesn't want the value of the raw materials. It wants the market value of the finished products. Thus, a market value clause makes sense for them.
Related or Semi-related Video
Econ: How Do Companies Add Value?1 Views
And finance Allah shmoop How do companies add value All
right people think about the way people improve things Give
him you know that little extra Take ice cream Ice
cream is good but a Sunday is better The ice
cream palace charges four dollars fifty cents for two scoops
of ice cream but take those same two scoops and
add whipped cream chocolate sauce A handful of knots Bunch
colored sprinkles plunk a cherry on top Now they can
charge seven dollars fifty cents rights three dollars more Why
while they added value the whipped cream chocolate and sprinkles
make the tree way more special If Little Billy doesn't
get his sprinkles or his cherry on top well he's
going to throw a fit He's going to cry and
stomp his feet and generally make more than three dollars
of misery for his parents They might not think the
extra three bucks worth the stuff is worth the three
additional dollars it takes to turn ice cream into a
Sunday there But they definitely think it through the day
without a temper tantrum is worth those three bucks so
they fork over the money and it's likely all those
extra toppings cost the ice cream servers way less than
three dollars It was ah high margin product costume maybe
twenty five cents Fifty Send something like that huge contribution
of profits when they add on those three bucks worth
of stuff Okay next up What about water Well water
is fine It's cheap It keeps you alive But give
it that little extra and water becomes a health hydration
beverage Take water from the tap basically free Now add
some vitamin C powder Mix in some artificial blueberry flavor
and a little coloring Put it all in a bottle
and then slap a label on it Now you've got
Big Paul's bonus Health Hydration Beverage Five dollars seventy five
cents for a twelve ounce bottle Big value added big
profit margin to the cellar Well the concept of value
added describes the amount you increase the utility or the
quality or the value of a product to the buyer
through whatever process you deploy you get a product or
some raw materials You do something to it It gets
more useful or at least it gets generally better In
some way you've added value to it Turn warm secretions
into silk turns Silk thread in the fabric Turn silk
fabric into sheets You silk sheets to help give the
honeymoon suite at the Paluch a Ville Interstate Motel six
Cinderella Lodge It's special charm adding value all the way
at a back flap Toe prospector underwear There we go
Put satellite radio in your car Gee that's a good
one Add color to an old movie Good turn Pig
snouts and pigeon spleens in tow Hot dog Dodger Dogs
Put a bow on a puppy All value added situations
Or send Billy to stay with his grand parents for
the weekend so they can deal with his ice cream
addiction for a couple of days You know good luck
with that Definitely something his parents would consider value added
grandparenting Yeah can
Up Next
What is the difference between market value and book value? These two figures describe what a company is worth. Book value does this by finding the...