The 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. So, what is Reinstatement Value Clause in Office Insurance Policy?
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’ that 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
Conditions that apply to Reinstatement Value Claims
- The claim amount changed to the 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- Conditions when the reinstatement value clause may be rescinded:
- The insured does not inform the insurer within the stipulated time (usu. 3 to 6 months) from the date of loss
- The insured does not want to replace or reinstate the property
Case of Reinstatement Value Clause in Office Insurance Policy: 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 an office insurance policy, which has a clear provision of reinstatement value. The coverage was 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 physical damage of Rs 20 lakh.
As L.T Engineering had an 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 anyone takes office insurance on a reinstatement basis, the insurer will pay for the acquisition and installation of the properties which are destroyed, at a value that 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 official insurance company agreed to settle the claim.
In this case, the loss was 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 destroyed in a fire.
Case of Reinstatement Value Clause in Office Insurance Policy: 2
Considering the risks that can arise and impact the earnings, J.S Mining purchased an 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 the installation or acquisition of the properties which could be more than their original purchase price.
Last month, heavy rainfall damaged a substantial part of the office when water entered it. It caused severe damage to machinery and equipment. As the company had an 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 insurer received the principle of average and the loss payment, less as compared to the reinstatement value. The difference between the reinstatement and the sum insured was borne by the policyholder itself. This highlights the potential ramifications of the worst excesses in coverage and an unfavorable claim settlement amount under the clause.