Reinstatement Value

1. Indemnity principle & its variations

Insurance policies in general follow the basic principle of Indemnity. The insurance contract is a promise by the Insurer to put back the Insured in same financial position as before the loss. In practice, this means that in event of a total loss of say a machinery that has been in  use for two years- is compensated by reducing the value of  new machinery by amount of depreciation for two years of use. This computation gives the “market value” of the machine lost/damaged.

However over the years this principle has been modified to suit the demands of business- the most common being “agreed value” in Transit insurance & Reinstatement value option in some areas of Property insurance.

2. Reinstatement value

The phrase “new for old” sums up the basic concept of reinstatement quite well. Instead of selecting the market value  as the base figure for insurance (sum-insured), a value that represents the price of an equivalent new item is to be selected. 

It is to be remembered thar for checking the correctness of value opted for insurance (Sum insured) for purposes of underinsurance/ average condition**, the value to be considered now shall be the higher new/ replacement/ reinstatement value. 

For example- a building constructed for Rs 10 lakhs five years back will have a market value of Rs. 10 lacs less 10% (taking life of 50 years & depreciation of 2% per year) ie. Rs 9 lacs. But its reinstatement value may be Rs. 10 lacs+ may be 0.5 lac= 10.5 lacs to take into consideration the cost increase/ inflation over the years. So, an insured should declare the value of Rs. 10.5 lacs for insurance ( to avoid the penalty of lower claim payment in case of a loss)**

3. Condition wordings

The terms attached to the RIV condition in the policy are

• This option is only available for Building, Machinery, Fixtures & fittings only 
• Care is to be taken to ensure that the values mentioned in the policy are the values representing the current replacement prices
• The replacement permitted is permitted only for property of the same type and features as the damaged/lost one. This aspect is specially important for technological improvements in machinery items resulting in equivalent replacements not being currently available. In such specific case suitable adjustments to bring down the value to the earlier level has to be made.
• Normally a limit of 12 months is permitted for reinstatement and the lost is payable only after the reinstatement job is complete. However a specific approval may be taken from the Insurer for permitting extension of time limits.
• The benefit of this condition is not available if insurer is not informed within 6 month of occurrence of loss
• Similarly in case of the insured not willing or unable to reinstate the damage property, the loss may be settled on normal indemnity basis (without benefit of RIV condition)

4. Who should/could opt for this cover

The cost benefit analysis that an Insured needs to do is- compare the additional premium payable on the difference of RIV & market value vs the likely monetary effect of The depreciation factor to be borne by Insured in event of a loss. 

In a way, this is same as in assessment of taking an insurance policy for covering a property versus being self-insured. Hence, advisable to be opted by everyone.

** Underinsurance / Average condition  requires that premium is paid on the correct sum insured in the policy. If this is not done, any loss in the policy is proportionately reduced. e.g.  if the building with current value of Rs 10 lacs is declared for insurance for Rs. 7 lacs; any loss shall be paid by Insurance Co. only in ratio of 7/10 & the insured has to bear 3/10 of loss himself.