Fire insurance policies often come with a reinstatement value clause in them which determines the methodology of claim settlement. The insurance company replaces the damaged property with a new property of the same type under the reinstatement value clause. The ‘New for old’ clause requires the insurance company to reinstate the damaged asset with a new asset.
Despite paying for a new asset, the reinstatement value clause still follows the principle of indemnity. The replacement asset or property matches the specifications of the damaged one. In the case of plant and machinery, if the new asset is technologically better than the older one, the insured would have to bear a portion of the cost of reinstating the damaged asset with the new asset because the old asset did not possess the same advanced technology as the new asset. Thus, the insured is liable to cover the cost of the new technology which comes with the new machine or equipment.
Key Takeaways
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Bye-Bye Depreciation: The single biggest benefit of RVC is that the insurer ignores how old your machine was. Whether it was 2 years old or 8 years old, they pay the current price of a new one of the same type and capacity.
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The “Technological Upgrade” Rule: If the exact same old model is no longer available and the new model has better technology, you may have to pay a small “betterment” portion. The insurer covers the “base” replacement, but you cover the “upgrade” value.
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Strict Timelines: This is a “use it or lose it” clause. You have 6 months to say you want to rebuild and 12 months to actually do it. If you decide to take the cash and not rebuild, the insurer will switch the payout to the much lower Indemnity (Market) Value.
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Sum Insured Precision: To avoid the “Average Clause” (where claims are cut proportionally), your Sum Insured must represent the current price of a new machine, including taxes and installation, not its historical purchase price.
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Property only, not Stock: Remember that RVC never applies to your inventory or raw materials. Stocks are always valued at their cost price or market value at the time of the fire.
The important provisions of the reinstatement value clause in Fire Insurance include the following –
- The insured must reinstate the damaged asset within 12 months from the date of damage or destruction. The insured can request an extension for reinstating the asset, subject to approval by the insurance company. Failing to meet the timeline will result in settling the claim on an indemnity basis.
- The fire insurance policy bases its liability on market value until the insured completes reinstatement.
- The pro-rata average method compares the sum insured with the reinstatement cost on the reinstatement date.
- The reinstatement value clause would not apply if the insured does not inform the insurance company of his/ her intention to replace the damaged asset within 6 months of loss. To qualify for claim settlement on a reinstatement value basis, the insured must provide the necessary information within the extended period. Moreover, if the insured is not willing to replace the damaged property, the reinstatement value clause would not apply. The claim will be settled on an indemnity basis in that particular scenario.
- The insured can choose to reinstate the damaged property or asset at any desired alternate location. However, this option is permissible only if it does not increase the liability under the fire insurance policy.
- Fire insurance policies apply reinstatement value clauses to new buildings, plants, machinery, equipment, etc. This clause does not cover stocks, even if they are included in the fire insurance policy.
- The sum insured in the policy is determined by the reinstatement value of the damaged asset or property.
- Bottom Line
Summary: Reinstatement Value Clause (RVC)
The reinstatement clause in fire insurance allows the insured to restore their property to its original condition after damage caused by fire. The clause provides for the payment of the cost of reinstatement, up to the policy limit, regardless of the amount of the loss. The insured must notify the insurer of their intention to reinstate the property and provide a detailed estimate of the cost of reinstatement. The insurer may also require that the insured provide proof of completion of the work before releasing the funds. When you buy a fire insurance policy, it is crucial to understand the concept of the reinstatement value clause to comprehend the claim settlement process.
Frequently Asked Questions (FAQs)
Q1: Why is the “12-month” rule so strict?
A) Insurers need to limit their exposure to inflation. If you wait 3 years to rebuild, the cost of construction might have doubled. The 12-month rule ensures the claim is settled based on current market rates. Extensions are possible but require formal approval before the deadline.
Q2: What happens if I don’t want to replace the machine and just want the cash?
A) If you choose not to reinstate, the RVC becomes void. The insurer will settle the claim on an Indemnity Basis, meaning they will deduct depreciation for every year you used the machine. This usually results in a significantly lower payout (often 30–60% less).
Q3: Can I use the money to buy a different type of machine?
A) You can, but the insurer’s liability is capped at what it would have cost to replace the original machine. If the new, different machine is more expensive, you pay the difference. If it’s cheaper, the insurer only pays the actual cost incurred.
Q4: How does the “Pro-Rata Average” work with RVC?
A) If a new machine costs ₹1 Crore today, but you only insured it for ₹70 Lakhs, you are “under-insured” by 30%. In the event of a partial loss of ₹10 Lakhs, the insurer will only pay ₹7 Lakhs (70% of the loss). Always insure for the full current replacement value.
Q5: Is RVC available for second-hand machinery?
A) Usually, no. Insurers are hesitant to provide “New for Old” cover for assets that were already old when you bought them. For second-hand assets, claims are typically settled on a Market Value basis unless a special agreement is made at the time of buying the policy.
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.
