Concept of Reinstatement value in Insurance

This is the value at which the damaged property can be reinstated or replaced by a similar property, without deducting depreciation. Agreed value is also sometimes mutually agreed upon by the insured and the insurer, subject to the valuation certificate. Following are the basis on which the sum insured can be fixed:

Property:-

1. Buildings, Plant, Machinery and Accessories Fixtures, Furniture & Fittings, Electrical Installations – Market Value or Reinstatement Value
2. Other Contents like household effects and contents in shops, etc – Market Value.
3. Properties whose market value cannot be ascertained, e.g, works of Art, Manuscripts, Obsolete Machinery, etc. – Agreed Value.

Stocks:-

1. Raw Material – Market Value, i.e the cost at which the insured can purchase it in the market to replace the damaged raw material.
2. Semi finished goods – Market Value, i.e the cost of raw materials plus all the overhead expenses incurred up to the stage it has been produced.
3. Finished goods – Market value, i.e, the cost of raw materials plus all the overhead expenses incurred till it reaches the finished goods stage. However, selling price including profit cannot be taken as the sum insured.

Extracts from “Guide for Fire Consequential Loss Insurance  (IC-57)” by Dr. Rakesh Agarwal. Copyright of Sashi Publications, kolkata www.sashipublications.com and www.bimabazaar.com