We have discussed below the two bases of claim settlement that can be opted in a fire insurance policy :
- Market value basis – the default one and
- Re-instatement value basis
To explain how does the claim settlement works in the above cases under Fire Insurance, let us start with an example on a Market value basis.
An insurer will indemnify the insured by payment of market value i.e. the replacement value of insured property or 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 which the settlement will be in the same proportion as is the sum insured in the policy to the actual market value of the item. In the case of a market value basis, the insured is not adequately compensated 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 an amount equal to the replacement or reinstatement value of the asset without deducting depreciation cost. However in case, the asset is replaced with a better configuration one, 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.
- 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 the extension request is approved insured has to ensure that the reinstatement is completed within the new timeline.
- Re-instatement can be carried out at the site of loss or a different
- Insured must intimate the insurance company about his/her intention to re-instate the asset within a maximum time of 6 months from the date of loss. In case the insured fails to do so the insurance company will consider that he/she is unwilling to re-instate the asset and settle the claim on a market value basis.
- Underinsurance and betterment clauses will be applicable in the calculation of actual claim settlement