Reinstatement Value Clause in Fire Policies

  

Large businesses need insurance to cover their buildings, plant and machinery, stocks etc., from unexpected losses or damage. Any loss will hamper their business operations. Also, an insurance cover is mandatory for loans taken for the business process. The standard fire policy covers a list of perils with many additional extensions and is a suitable cover for insuring assets. The standard fire policy covers the following perils:

·       Fire

·       Lightning

·       Explosion/implosion

·       Aircraft damage loss,

·       Riot, strike, malicious damage

·       Storm, cyclone, typhoon, tempest, hurricane, tornado, flood and inundation.

·       Impact damage

·       Subsidence and landslide including rock

·       Bursting and/or overflowing of water tanks, apparatus and pipes x missile testing operations

·       Leakage from automatic sprinkler installations

·       Bush fire

·       Earthquake (which can be covered on payment of additional premium)

Sum insured is chosen by the insured at the inception of the policy, this is the value of assets at current rate. This is called the market value of the asset. Fire policies usually stipulate sum insured on market value basis. However, there is another option for the insured other than the market value, that is the reinstatement value basis of sum insured. Let us examine the reinstatement value clause in detail.

 Reinstatement value clause in fire insurance policy

Reinstatement value clause is a clause attached to the standard fire policy, specifying the basis of sum insured for new buildings, plant & machinery.  Reinstatement value clause cannot be offered to old assets. Also, this clause does not apply to stocks.

Claims under fire policies are usually settled either on market value basis or reinstatement value basis as explained below:

Market value basis: Claims are settled after taking into account the depreciation of the property. Depreciation is the loss of value, of the asset due to usage. The continuous use of a building, plant and machinery and other assets leads to wear and tear of an asset. This results in depreciation in its value. The percentage of depreciation is calculated depending on the number of years of the asset. This percentage is applied on the claim payable amount as recommended by the surveyor.

Reinstatement value basis:  The insurer pays the replacement value of the damaged property or asset, as the claim amount. Policyholder has to replace the damaged property with a new one of the same kind. This clause does not take into account the depreciation of the property. Unless the property is replaced or rebuilt the clause does not come into action.

How does the reinstatement clause in a fire policy work?

The reinstatement clause operates on the indemnity principle, so damaged asset must be replaced with a new one of the same identification and model. Obviously, the building or machinery will be improved and more advanced due to this replacement, the policyholder hence must bear the cost of improvement to comply with the principle of indemnity, as the new and replaced property is superior and does not conform to the old and damaged one.

Insurer will pay only what is required to replace the asset to its pre loss condition. Insured has to bear the cost of improvements in the asset.

 In cases of partial loss too, the insurer will cover repair costs without considering depreciation.

Key features of the reinstatement value clause

With the application of reinstatement value clause, the insured cannot recover amounts more than what is required to restore the property to pre-loss condition. This clause is a modification of the indemnity principle of insurance as depreciation is not taken into account.

Normally claim is settled on market value basis. Insured can use the reinstatement value clause to make a profit as it has nil depreciation, so to address the moral hazard aspect of the insured, the clause is subject to various conditions. Unless the property is replaced the benefit of claim is altered to market value basis.

Conditions of reinstatement value clause in fire insurance

The damaged asset must be replaced within 12 months from the date of damage, it can be extended with a request from the insured and upon the discretion of the insurer.

Intention to reinstate within six months from the date of damage must be informed to insurer or the insurer will settle the claims on market value or indemnity basis.

The reinstatement value clause applies to fixed assets like buildings, plant & machinery, and furniture in new condition, but not to stocks.

Damaged property can be replaced at an alternate location, provided it is within the sum insured of the policy

Reinstatement value claims are only valid if the damaged property has been repaired or replaced.

The sum insured is arrived at the inception of the policy keeping in view the replacement costs in the event of a claim.

If the asset is not replaced and the insured has expressed unwillingness to reinstate, the insurer will pay the claim on indemnity or market value basis, after deducting depreciation of the damaged asset.

Reinstatement value clause is an effective solution where small units of large businesses can be repaired and replaced without hindrance to the regular operations. The insurer also offers thorough protection and cover which helps the business owner in saving time, as the insurer will willingly overview the damaged portion of loss scrupulously, by being in regular coordination with the concerned.

We at Zen Insurance Brokers assist in choosing the right Insurance cover to suit your needs. Please contact us for assistance.

Disclaimer:

Zen Insurance Brokers is an IRDAI registered broker which facilitates quick & accurate insurance broking services. We deal with only regulator approved products of insurers. We do not underwrite the products.