Optional Settlement Clause

What Does Optional Settlement Clause Mean?

An optional settlement clause is a provision in an insurance contract that allows the policyholder to choose from several different settlement options if a covered loss occurs. For example, if a homeowner’s insurance policy includes an optional settlement clause, it may give the policyholder the option to have their home repaired or replaced, depending on the extent of the damage. For homeowners, the way an insurer handles repair versus replacement is one of the practical differences between homeowners insurance providers, so it’s worth asking about before you sign a policy.

Insuranceopedia Explains Optional Settlement Clause

Optional settlement clauses can be crucial when a policyholder experiences a loss. For instance, if an auto policy includes an optional settlement clause that allows the policyholder to choose between having their car repaired or replaced at its actual cash value, this means they would not be reimbursed for the full replacement value of the car. Because the actual cash value option can leave a gap between what the insurer pays and what a car loan balance might be, drivers with financed vehicles often buy standalone GAP insurance to cover that shortfall. The specific terms of an optional settlement clause can be negotiated between the policyholder and the insurer before the policy is purchased.