IRDAI License Number: IRDAI/INT/ISNP/2022/250
Reinstatement value is the cost to build or restore the asset to its original state or condition. Standard fire and special perils policy usually come with a reinstatement value clause. The reinstatement value clause defines the methodology of claim settlement in case of damage to the assets like building, machinery and other fixed assets. The damaged property will be replaced by new property of the same type under the reinstatement value clause. Such types of insurances empower the businesses to replace the damaged property without putting any financial strain on their own resources and is quite popular amongst building owners and industrialists.
It is to be noted that though the reinstatement value clause pays for new asset or property, the principal of indemnity applies to it. This means the property or asset replaced will be of the same specifications as it was before the loss occurred. The insured will neither get more or less than the value of the actual loss borne by them. If in the case the new asset like machinery where the same model is not available anymore and the new model is technologically better than the old one. In such scenarios, the insured will be liable to pay the portion of the cost of replacing the lost asset with the new one as the old asset did not have the same more developed specifications as the new one.
The reinstatement value clause is applicable to machinery, plant, building, furniture, fixture and fittings. It does not apply to stock even though the stock is covered under the fire insurance policy.
The replacement of the damaged assets must be done in a time frame of 12 months from the date of damage of the asset. Although the insured can apply for an extension and if the insurance company allows the additional time the reinstatement needs to be completed in that extended period. If the insured does not adhere to the timeline then the claim will be settled on an indemnity basis until the time that the reinstatement is not done, the liability under the fire insurance policy will be calculated on a market value basis.
The insured is allowed reinstatement of the damaged asset or property at another location. However, it is to be noted that while doing so the liability under the insurance policy will remain the same.
The policy sum insured will be dependent on the reinstatement value of the property or asset which is lost or damaged.
If the insured fails to inform the insurance company of his or her intentions to replace the damaged assets within a period 6 months of loss then the reinstatement clause will not apply. If the insured has applied for an extended time then the information should be given to the insurance company within the extended time frame. Failing to do so the reinstatement clause will not apply and the claim will be settled on indemnity basis only.
It is extremely crucial to go through the schedule of the policy and properly understand the concept of the reinstatement value clause by the insured. This will avoid any situations of confusion and unpleasant surprises during the time of claim settlement.
