What is the primary purpose of determining fair market value in insurance?

Determining fair market value plays a crucial role in establishing the appropriate insurance coverage amounts. Insurers must assess the value of an asset or property accurately to ensure that a policyholder has sufficient coverage to protect against potential loss. This valuation helps to set limits on how much the insurer is obligated to pay in the event of a claim, ensuring that the policyholder is adequately compensated for their loss. Fair market value reflects the price that an informed buyer would pay and an informed seller would accept in the open market, providing a realistic basis for assessing coverage needs and limits within an insurance policy.

In contrast, while premium rates can reflect the underlying risk and value of what is being insured, they are influenced by many factors beyond just fair market value. Policyholder liability is more about the obligations and responsibilities of the insured and insurer, which also does not directly hinge on fair market value. Evaluating investment returns pertains more to the insurer's financial performance rather than an immediate aspect of policy coverage decisions.