Reinstatement Value Clause: What is it & How Does it Work Under Fire Insurance?

Fire can cause huge losses to property owners and businesses. This is why having a fire insurance policy is crucial, as it safeguards property against fire damage. However, determining the value of assets or property under a fire or burglary insurance policy can be a little difficult.

Therefore, a reinstatement value clause comes into play to make this process easy. By knowing all about the reinstatement value clause in fire insurance, we can make an informed decision.

What is the Reinstatement Value Clause in a Fire Insurance Policy?

The reinstatement value clause in fire insurance policy is generally a claim settlement method. Under this clause, the insurance provider pays the policyholder the replacement value of the damaged property.

This helps the policyholder by offering financial assistance to replace the damaged property with a new one.

Under this clause, general wear and tear or depreciation are not considered when settling claims. In simple words, the policyholder will get the full value of the asset or property irrespective of condition and age.

How the Reinstatement Value Clause in a Fire Insurance Policy Works?

The reinstatement value clause in a fire insurance policy is based on the indemnity. It simply means the policyholder will get the same financial assistance as before the fire damage.

The clause is in place to ensure that the policyholder does not profit from the fire damage. In this clause, the policyholder can claim the price of reinstating or replacing the damaged assets or property with new ones. The working of the reinstatement value clause in a fire insurance policy is as follows:

• When purchasing a fire insurance policy, policyholders need to declare the sum insured of the assets or property, depending on the reinstatement value.
• In the reinstatement value clause, policyholders must pay a higher premium than the market value for a policy.
• When a fire incident occurs, policyholders need to notify the insurance provider about the incident and submit all the necessary documents.
• Once the request has been submitted, the insurance provider will assign a surveyor to assess the damage or loss to the insured property.
• The surveyor also verified the property’s reinstatement value. Once everything is clear, the insurance provider will pay the claim amount by factoring in the reinstatement value of assets or property.
• The policyholder must use the claim amount to reinstate or replace the damaged property with new property of the same quality.

Things to Consider Under the Reinstatement Value Clause

When considering a fire insurance policy with a reinstatement value clause, you need to buy a plan from a reputable provider like TATA AIG. They offer customised plans based on your business needs. However, there are some points to consider before buying a policy::

• The reinstatement value clause is only applicable if the property or asset damaged by the fire is being replaced or repaired.
• If the asset or property is not being replaced, the insurance provider will calculate the claim amount based on its market value or the indemnity clause. This means the depreciating value of assets will also be factored in.
• The sum insured in this clause depends on the replacement value of the asset or property.
• The reinstatement value clause will only apply if the damaged asset is replaced within 12 months of the date of damage.
• Suppose the policyholder does not notify the insurance provider about the intention to reinstate the damaged assets or property within 6 months from the date of damage. In that case, the insurance provider will settle the claim based on the indemnity and market value.
• The value of damaged property in the reinstatement value clause is calculated by the pro-rata method. Under this method, the value is decided by comparing the reinstatement cost of the entire asset or property against the sum insured.
• The clause applies only to fixed assets like furniture, plants and machinery, buildings, etc. It is not applicable to stocks.

Conclusion

The reinstatement value clause in a fire insurance policy is important for restoring the damaged property and assets to their original condition after damage caused by the fire. The clause ensures that the policyholders receive fair compensation based on the cost of reinstatement, regardless of the amount of loss. At the time of purchasing a fire insurance policy, you need to know the concept of the reinstatement value clause to ease the claim settlement process.