Reinstatement Value Clause (RVC), defines the terms and conditions of payment of reinstatement claims under property insurance policies. It defines the reinstatement value that will be payable after the loss, and the conditions under which this value may be altered even after the claim has been accepted by the insurer.

Reinstatement Value Defined under RVC

The principle of indemnity inspires this definition, according to which, the ‘cost’ of reinstatement of the property will be the ‘cost’ which would have been incurred if the property is reinstated at the same place where it existed before the loss. This ‘cost’ will exclude:

  • Any cost of modification
  • Cost of transfer to other location
  • The positive cost differential of reinstating the property at another place

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Conditions that apply to Reinstatement Value Claims

  • The claim amount will be changed to standard claim amount if the reinstatement of the property is not complete within 12 months of the loss/destruction,
  • The insurer will release only the standard cover amount unless the insured has spent money on reinstatement or replacement of damaged property
  • If the value of the damaged property at the time of loss exceeds the sum insured under the policy, the claim will be prorated accordingly, and the insured will bear the excess
  • Conditions when reinstatement value clause may be rescinded:
    • Insured does not inform the insurer within the stipulated time (usu. 3 to 6 months) from the date of loss
    • Insured does not want to replace or reinstate the property

Case: 1

Established in 2000, L.T Engineering has carved a niche for itself in the engineering segment. In addition to complying with all the safety measures to keep its office space safe, the company has also purchased office insurance policy, which has a clear provision of reinstatement value. The coverage was of Rs 1 crore.

Last month, a fire erupted at the office due to short-circuit and engulfed the assets worth Rs 20 lakh. Luckily, there was no loss of life, however, there was a physical damage of Rs 20 lakh.

As L.T Engineering had office insurance policy, the company approached the insurer for the claim settlement. In this case, the insurance policy had a clause of reinstatement value. When any one takes the office insurance on the reinstatement basis, the insurer will pay for the acquisition and installation of the properties which are destroyed, at a value which could be higher than the actual purchase price.

Here, the insurer appointed a surveyor who carefully scrutinized the situation and submitted its report. On the basis of this report, the office insurance company agreed to settle the claim.

In this case, the loss was of Rs 20 lakh, and the reinstatement value was Rs 50 lakh. As the sum insured was Rs 1 crore, the loss fell under the purview of the insurance cover. The insurer paid reinstatement value to the policyholder who was enough to acquire those properties which were destroyed in a fire.

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Case: 2

Considering the risks that can arise and impact the earnings, J.S Mining purchased office insurance policy for Rs 50 lakh to get coverage against perils like fire, theft, earthquake, etc. The policy had a reinstatement clause according to which the insurer will pay for installation or acquisition of the properties which could be more than their original purchase price.

Last month, heavy rainfall damaged the substantial part of office when water entered it. It caused severe damage to machinery and equipment. As the company had office insurance policy, it approached the insurer for the claim settlement.

Here the loss happened due to insured peril, and therefore, the insurer appointed a surveyor for computing the extent of the loss.

The insurer found the total loss as Rs 20 lakh and its reinstatement value as Rs 80 lakh. In this case, the reinstatement value was more than the sum insured, therefore, the principle of average was applied and the loss payment received by the insurer was less as compared to the reinstatement value. The difference between the reinstatement and the sum insured was borne by the policyholder itself.

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