What is reinstatement clause in Fire Insurance?

Fire insurance policies often come with a reinstatement value clause in them which determines the methodology of claim settlement. Under the reinstatement value clause, the damaged property is replaced by a new property of the same type. This clause is also called the ‘New for old’ clause as the insurance company is liable to pay for reinstating the damaged asset with a new asset.

Though the reinstatement value clause pays for a new asset or property, the principle of indemnity is followed. The asset or property replaced would be of the same specifications as the one which is damaged. In 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 in the new machine or equipment. 

The important provisions of the reinstatement value clause include the following – 

  • Reinstatement of the damaged asset must be done by the insured within 12 months from the date of damage or destruction of the asset. The insured can also apply for an extension in the time for reinstating the asset and if the insurance company allows an additional time, reinstatement should be completed within the extended time. If the time-line is not followed, the claim would be settled on an indemnity basis only
  • Till the time that reinstatement is not done,  the liability under the fire insurance policy would be determined on indemnity basis which is the market value basis
  • The pro-rata average method would be applied by comparing the sum insured of the fire insurance policy with the reinstatement cost of the entire property on the reinstatement date
  • 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. If an extended time is availed, information should be given within the extended time period to avail reinstatement value basis of claim settlement. Moreover, if the insured is not willing to replace the damaged property, the reinstatement value clause would not apply. In that case, claim would be settled on an indemnity basis
  • Reinstatement of the damaged property or asset can be done at any alternate location as desired by the insured. However, this would be allowed only if the liability under the fire insurance policy does not increase due to change in location
  • Reinstatement value clauses in fire insurance policies are applied on building, plant and machinery, equipment, etc. which are in a new condition. The clause is not applicable on stocks even when the stock is covered under a fire insurance policy.
  • The sum insured of the policy would depend on the reinstatement value of the asset or property which is damaged

The concept of reinstatement value clause should be properly understood when buying a fire insurance policy so that you know how a claim would be paid.