What is reinstatement value in fire insurance?

Two main methods of declaring the sum insured of your property or assets under a fire insurance policy are reinstatement and market value.

Reinstatement of the sum insured policy is the cost of reinstating or replacing your property or assets with new ones of the same kind and quality without any deduction for depreciation or wear and tear. This means you will get the full value of your property or assets as if they were new, regardless of age or condition.

Market value is the cost of buying your property or assets in the open market after deducting the depreciation or wear and tear. That means you will get the value of your property or assets as they are, considering their age and condition.

The reinstatement valuation clause is based on the principle of indemnity. It means the policyholder should be restored to the same financial position as before the loss or damage, no more and no less.

However, this clause modifies the principle of indemnity by allowing the policyholder to claim the cost of reinstating or replacing the property or assets with new ones instead of the market value of the property or assets as they are.

• The reinstatement value clause works as follows:

• When buying the fire insurance policy, the policyholder must declare the sum insured of the property or assets based on the reinstatement value, not the market value.

• The reinstatement value clause requires the policyholder to pay a higher premium rate than the market value method.

• In a fire claim, the policyholder must notify the insurer and submit the necessary documents and proof of loss or damage.

• The insurer will appoint a surveyor or an expert to assess the extent and value of the loss or damage and verify the reinstatement value of the property or assets.

• The insurer will pay the claim amount to the policyholder based on the reinstatement value of the property or assets, subject to the sum insured and the special provisions and conditions of the reinstatement value clause.

• The policyholder must use the claim amount to reinstate or replace the property or assets with new ones of the same kind and quality within the specified time limit and at the specified site and manner.

The reinstatement insurance clause works as follows:

To illustrate the calculation of the claim amount under the reinstatement value clause, let us take an example of a 10-year-old machine that costs ₹10 lakhs to buy new but only ₹4 lakhs to buy in the market.

Suppose the machine is insured for ₹8 lakh under the reinstatement value clause and is completely destroyed by fire. The claim amount would be ₹8 lakh, which is the lower of the sum insured and the reinstatement value. The policyholder can use this amount to buy a new machine of the same kind and quality.

If the machine is insured for ₹12 lakh under the reinstatement value clause, the claim amount would still be ₹10 lakh, which is the reinstatement value of the machine. The policyholder cannot claim more than the reinstatement value, even if the sum insured is higher. This is to prevent overinsurance and profiteering.

Some of the special provisions and conditions under the reinstatement value clause are:

Time Limit: The policyholder must reinstate or replace the property or assets with new ones within a specified time limit, usually 12 months from the fire loss or damage date.

If the policyholder fails to do so, the insurer will only pay the market value of the property or assets, not the reinstatement value.

Site and Manner of Replacement: The policyholder must reinstate or replace the property or assets in the same site and manner as before the fire loss or damage.

If the policyholder wants to change the site or manner of replacement, the insurer must give prior consent and approval and may adjust the claim amount accordingly.

Average Clause: The policyholder has to insure the property or assets for at least 85% of the reinstatement value.

Otherwise, the policyholder will bear a proportionate share of the loss or damage. This prevents underinsurance and ensures that the policyholder pays a fair premium for the reinstatement value clause.

Contribution Clause: If the policyholder has more than one fire insurance policy covering the same property or assets, the insurer will only pay the claim amount in proportion to the sum insured under each policy. This is to prevent overinsurance and double recovery.

No Underinsurance or Overinsurance: Underinsurance occurs when the sum insured is lower than the market value of the property or assets. In comparison, overinsurance occurs when the sum insured is higher than the market value of the property or assets.

The reinstatement value clause ensures that the sum insured is based on the reinstatement value of the property or assets, which is the most accurate and reliable measure of their value.

Peace of mind and security: The reinstatement value clause provides peace of mind and security for the policyholder, as the policyholder does not have to worry about the loss of value or utility of the property or assets due to fire.

The policyholder can also avoid the hassle and stress of negotiating or disputing with the insurer over the claim amount, as the reinstatement value clause is clear and transparent.

Reinstatement value in the fire insurance policy is a valuation method that can help protect your property from fire risk and provide you with full and fair compensation in case of fire damage.

It differs from market value as it does not deduct depreciation or wear and tear. The reinstatement value clause in SME business insurance has some conditions you must follow, such as a time limit and an average clause.

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What is fire reinstatement?

Fire reinstatement is the process of restoring or replacing a property or asset that has been damaged or destroyed by fire.

A fire insurance policy usually covers it with a reinstatement value clause, which pays the reinstatement cost up to the policy limit regardless of the amount of the loss.

What is the difference between market value and reinstatement value?

Market value is the price a property or asset would fetch in the open market after deducting the depreciation or wear and tear. Reinstatement value is the cost of rebuilding or repairing a property or asset with new materials and labour without deducting anything for depreciation or wear and tear.

Market value may be lower than reinstatement value, especially for properties or assets that lose value over time or have a long useful life.