We have discussed below the two bases of claim settlement that can be opted in a fire insurance claim settlement :
- Market value basis – the default one and
- Re-instatement value basis
To explain how the claim settlement works in the above cases under the Fire Insurance policy, let us start with an example on a Market value basis.
Key Takeaways
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The Depreciation Gap: On a Market Value basis, the insurer deducts for age and wear (depreciation). This means the payout is often insufficient to buy a new machine, forcing the owner to pay the difference out-of-pocket.
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New for Old: Reinstatement Value is the “gold standard” for recovery because it pays the cost of a brand-new asset of the same kind, effectively ignoring the age of the item destroyed.
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Fixed Assets Only: The Reinstatement clause cannot be applied to stocks or work-in-progress. Inventory is always settled on a market value basis since it is intended for sale, not long-term use.
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Strict Timelines: To qualify for a Reinstatement payout, you must inform the insurer of your intent to rebuild within 6 months and complete the work within 12 months (unless an extension is granted).
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Failure to Reinstate: If an insured party takes the money but decides not to actually rebuild or replace the asset, the insurer will revert the settlement to a Market Value basis and deduct depreciation.
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The Betterment Rule: If you replace a destroyed machine with a technologically superior or higher-capacity model, the “Betterment Clause” triggers, and you must pay the additional cost for that upgrade yourself.
An insurer will indemnify the insured by payment of market value i.e. the replacement value of the insured property. Or an item as new after deducting a due allowance for betterment and depreciation. The above settlement applies if the sum insured of the damaged item in the policy is equal to or greater than the market value of the item. In case the sum insured is less, under insurance clause will apply. According to this, the settlement will be in the same proportion as the sum insured in the policy to the actual market value of the item. In the case of a market value basis, the insured does not adequately compensate because the insurer deducts the depreciation cost.
The process of claim settlement under fire insurance is slightly different in the case of reinstatement value. Here the insurer indemnifies the insured with an amount equal to the replacement. Or reinstatement of the value of the asset without deducting depreciation cost. However in case, replaces the asset with a better configuration, the insured has to contribute to the cost of replacement.
Below are a few important points to be noted for claim settlement in fire insurance pertaining to reinstatement value –
- The reinstatement value clause is only applicable to fixed assets – building, plant & machinery, furniture & fixture, etc. It does not apply to stocks and work-in-process items.
- The insured must commence the reinstatement as soon as possible and complete it within 12 months from the date of loss. In case the insured feels that the time duration of 12 months is too short he can seek for extension from the insurance company by providing valid reasons. Once approved the extension request, the insured has to ensure that the reinstatement completes within the new timeline.
- Re-instatement carried out at the site of loss or a different
- The insured must intimate the insurance company about his/her intention to reinstate the asset within a maximum time of 6 months from the date of loss. In case the insured fails to do so, the company will consider he/she is unwilling to reinstate the asset. And settle the claim on a market-value basis.
- Underinsurance and betterment clauses will be applicable in the calculation of the actual claim settlement.
Summary Table: Market Value vs. Reinstatement Value
| Feature | Market Value Basis | Reinstatement Value Basis |
| Calculation Method | Replacement cost minus depreciation. | Replacement cost without depreciation. |
| Default Status | Standard default basis for most policies. | Optional clause; must be specifically opted for. |
| Asset Suitability | Applicable to all assets, including stocks. | Only for Fixed Assets (Building, Plant, Machinery). |
| Notification Requirement | Standard claim notification. | Intention to reinstate must be declared within 6 months. |
| Completion Timeline | No specific rebuilding deadline. | Reinstatement must be completed within 12 months. |
| Financial Outcome | Insured pays for the “betterment” via depreciation. | Insured gets a new asset for an old one. |
Frequently Asked Questions (FAQs)
1. Why would anyone choose “Market Value” if “Reinstatement Value” is better?
A) Market Value policies usually have lower premiums. Additionally, for certain items that are easily replaced in the used market or for businesses on a very tight budget, Market Value may be the only affordable option.
2. What happens if I can’t finish rebuilding my factory within the 12-month limit?
A) If you have valid reasons (such as government permit delays or supply chain issues), you must apply for an extension from the insurance company. If you fail to finish without an approved extension, your claim may be settled on a depreciated Market Value basis.
3. Does Reinstatement Value cover the cost of a better, newer model of my machinery?
A) It covers the cost of an asset of the “same kind and quality.” If your exact old model is no longer available, it covers the closest equivalent. However, if you purposely choose a more advanced machine, you will have to pay the extra cost for that “betterment.”
4. Can I use the Reinstatement payout to rebuild my office at a different location?
A) Yes, reinstatement can usually be carried out at the original site or a different site, provided the cost does not exceed what it would have cost to rebuild at the original location and the insurer is informed.
5. How does “Underinsurance” affect a Reinstatement claim?
A) If your Sum Insured is lower than the actual cost of reinstating the entire property at the time of the loss, the Underinsurance Clause applies. Your claim will be reduced proportionately, meaning you will only receive a percentage of the total replacement cost.
About The Author
Shivani
MBA Insurance and Risk
She has a passion for property insurance and a wealth of experience in the field, Shivani has been a valuable contributor to SecureNow for the past six years. As a seasoned writer, they specialize in crafting insightful articles and engaging blogs that educate and inform readers about the intricacies of property insurance. She brings a unique blend of expertise and practical knowledge to their writing, drawing from her extensive background in the insurance industry. Having worked in various capacities within the sector, she deeply understands the challenges and opportunities facing property owners and insurers alike.
