Process of reinstatement value fire policies.

This is a policy issued on the fire policy form with a Reinstatement Value Memorandum. The salient features are:

  1. This policy is issued on buildings, plant, machinery, furniture, fixture and fittings , but not on stocks.
  2. This policy differs from the fire policy on the basis of the market value of the insured property immediately before the fire. This value is arrived at strictly according to the principle of indemnity, i.e by taking into account depreciation, wear and tear etc.
  3. Under the reinstatement value policy, the payment to be made is the cost of reinstatement of the building or the cost of replacement of the machinery to a condition equal to its condition when new.
  4. Thus, under this policy it is possible to recover  the cost of replacement of the  damaged property by new property of the same kind not the depreciated value. If the property is damaged, then the cost of making good that damage is paid.
  5. Under the fire policy ,the sum insured is the market value whereas under this policy new reinstatement or new replacement value is the sum insured.
  6. This form of insurance was introduced in the U.K in the post world war 1  scenario when the cost of rebuilding and machinery had become so high that the indemnity provided by the fire policy was inadequate.
  7. The depreciation funds provided by the business concerns in their annual accounts were insufficient till the gap between the amount payable under fire policies and the cost of new buildings and plants.
  8. The operative part of the reinstatement value clause states that in the event of the property insured being destroyed or damaged, the basis upon which the amount payable  shall be calculated as the cost of replacing or reinstating a similar property
  9. The words ” Property of the same kind and type” are important .e.g Textile machinery cannot be replaced by chemical machinery or vice versa.
  10. Equally important are the words “Not superior to or more extensive than the insured property when new as on the date of  the loss.
  11. The damage property is replaced by new property which however is in no way better  than the insured property when new. If due to technical advancement replaced machinery is better than the damaged machinery. The output is increased with less consumption of power, the insured is obliged to bear a part of the cost of the new machinery to ensure that he does not derive any undue benefits.
  12. As far as possible the new machinery should be of the same production capacity, producing more or less  product of the same quality. Being identical is the main but not the sole criterion. Each case is considered on  merits  and decisions on allowances and adjustments are taken through negotiations.
  13. Due to technological advancement , replacement of manually operated machines with automatic or semi automatic ones may be desired by the insure. In such cases substitutions by less or more numbers of such improved machines are considered to maintain more or less the same production.
  14. Similarly the new building should not be more extensive or superior to the one destroyed. As in the case of machinery any betterment if accrued to the insured, he is made to contribute towards the cost of betterment.
  15. Loss settlement on total loss of building and machinery has been considered. In the event of partial damage  to the building or machinery ,the basis of settlement is the cost of repair without taking into account depreciation.
  16. There are four provisions in the reinstatement clause.

They are

  1. The work of reinstatement must be commenced and carried out by the insured and completed within 12 months from the  date of destruction or damage, failing which the loss will be settled on the basis of indemnity according to the fire policy.
  2. Until reinstatement  is carried out by the insured, the liability  of the company is limited to the normal market value.
  3. This provision relates to the application of prorate average. If at the time of reinstatement or replacement, their cost exceeds the sum insured at the time of loss ,it is deemed to be underinsurance and insured has to bear a ratable portion of the loss.

Since the cost at the time of reinstatement is considered it is advantageous to complete the reinstatement as soon as possible. Secondly it emphasizes the need for fixing an adequate sum taken into account the future cost and the inflation factor.

4)    Reinstatement basis of settlement will not apply

  • If the insured fails to intimate the insurer within six months  from the date of loss, his intentions to replace the damaged property,
  • If the insured is unwilling or unable to replace the damage property , the loss will be settled on the normal basis of indemnity.