How Does Reinstatement Value Clause Work Under Fire Insurance?

Every property that you own is valuable. Whether it is your house or your office, it takes a lot of money to buy and furnish it with the items and furniture of your liking. But what will you do if there is a sudden short-circuit leading to a fire that soon engulfs your entire property? It is difficult to imagine the destruction that will be caused in such a situation, let alone the losses that you will end up suffering. But even in such horrifying incidents, you can prevent yourself incurring any losses if you have your property and assets covered under a fire insurance policy.

What is Fire Insurance?

Fire insurance is an insurance policy that covers the policyholder against any losses incurred in case his property is damaged in a fire. It also covers the insured property from any loss or damages caused due to the incidents of lightning, bush fire, explosion, natural calamities, aircraft damage, bursting/ overflowing of water tanks, manmade hazards, etc. Apart from the structure of the property, a fire insurance policy also provides coverage for furniture, valuables, stock, plant & machinery, precious items or antiques and other personal assets.

In short, a fire insurance policy is the best way of protecting your property and assets for any damages caused by fire and related perils in exchange for a premium.

What is Reinstatement Value in Fire Insurance Policy?

The reinstatement value is a method of claim settlement under a fire insurance policy. In the case of the reinstatement value clause, the insurance company reinstates the damaged property or asset by paying its replacement value as the claim amount to the policyholder. It enables the policyholder to replace the damaged property with a new property of the same type. Moreover, it does not consider the depreciation and general wear & tear of the damaged property or asset at the time of settling the claims.

Since the insurance provider is liable to pay for the cost of replacing the damaged asset or property with a new one, the reinstatement clause is also known as the ‘New for Old’ clause.

How Does Reinstatement Value Clause Work?

The reinstatement clause works on the principle of indemnity. This means that the damaged property or asset can only be replaced with a new asset of the same kind, type and specifications. For example, if your chemical machinery was damaged in a fire, you cannot get the reinstatement cost of textile machinery. Similarly, the model, technology version as well as the output capacity of the asset should also be the same as the previous one. The insurance company will not pay for the cost of replacing the damaged asset with a more advanced one as the older asset did not possess the same advanced technology at the time of policy purchase.

In case the newly replaced property or asset is better or technologically advanced than the damaged one, then the policyholder will be liable to share the cost of reinstatement with the insurance company. While the policyholder will be required to pay for the cost of the new technology which the new asset comes with, the insurance provider will cover the remaining cost. 

In case of partial loss or damage to the property or asset, the insurance company will pay for the cost of repairing the damaged asset without factoring its depreciation.

Points to Remember Under the Reinstatement Value Clause

Before you purchase a fire insurance policy with a reinstatement value clause, go through the following features and provisions of the clause to know what and how will you be paid:

• The reinstatement value clause is applicable only on fixed assets, such as the building, plant & machinery, furniture, fittings, etc. which are in new condition. However, it does not apply to stocks on the property or in transit.
• The sum insured of the fire insurance policy depends on the reinstatement or replacement value of the damaged property or asset.
• You can make a reinstatement value claim only if the damaged property or asset has been repaired or replaced.
• The insurance company will determine a claim under your fire insurance policy on indemnity or market value basis unless the damaged asset is not replaced. Under the market value clause, the insurance company pays the claim amount after deducting the depreciating value of the damaged asset or property.
• The damaged asset must be replaced by the policyholder within 12 months of the actual date of damage or loss of the asset. In case you are unable to reinstate the damaged asset within 12 months, you can request the insurance company for an extension of time. If the extension is granted, you should ensure to reinstate the asset with the extended time period. If you are unable to replace the damaged asset within the specified time-frame, then the insurance company will indemnify the claim on a market value basis.
• The insurance company will not be liable to pay the replacement cost of the damaged property or asset under the reinstatement value clause if you do not inform them about your intention to reinstate the damaged asset within six months from the date of damage or destruction. In case an extended time period is granted by the insurer, you must inform him about the asset replacement within that time period. If you fail to do so, your insurer will settle the claims on market value or indemnity basis.
• The reinstatement clause can be applied using the pro-rata method by comparing the reinstatement cost of the whole property against the sum insured of your fire insurance policy.
• The damaged property or asset can be replaced at an alternate location as per your preference, provided it does not increase the liability of the insurance provider under your fire insurance policy.

In a Nutshell

Reinstatement value clause is one of the methods through which insurance companies settle claim under a fire insurance policy. While it is available for only fixed assets, it provides the full value of replacing the damaged property or asset without calculating its depreciation. However, you need to be mindful about the provisions of a reinstatement value clause. Only when these provisions are met, you will be able to make a reinstatement value claim under your fire insurance policy.