Indemnity versus Reinstatement
01 November 2012 | Magazine Archives FAnews & FAnuus | Short Term | Alan Blem, Associated Loss Adjusters
There are two methods typically employed by the short-term insurance sector in determining the appropriate value of a loss… In today’s article Alan Blem of Associated Loss Adjusters considers the differences between indemnity and reinstatement...
Indemnity is best described as compensation for a loss or injury sustained, and all contracts of property or pecuniary insurance are referred to as contracts of indemnity.
The intension of a party to the contract is that the insured, on the happening of an insured event, will be placed by the insurer, in the same pecuniary position that the insured occupied immediately before the event. This is subject to any limitations which may have been agreed and written into the contract!
Replacing "like for like”
In other words, if an item of equipment which was 10 years old was damaged beyond repair insurers would be liable to indemnify the insured based on the value of an item of a similar age and condition. Depreciation would need to be considered and much debate would thereafter follow regarding an acceptable "market related” value.
Over the years an alternative method of settlement has evolved and sections of many policies now incorporate a Reinstatement Value Condition Clause and/or Replacement Value Condition.
Turning to Multimark
The Reinstatement Value Condition Clause, depicted in the Fire and Building Combined Sections of the commonly utilised Multimark III Policy, states inter alia, as follows:
In the event of property, other than stock, being damaged, the basis upon which the amount payable is to be calculated, shall be the cost of replacing or reinstating on the same site, property of the same kind or type, but not superior to nor more extensive than the insured property when new.
Provided that –
1. The work of replacement or reinstatement (which may be carried out upon another site and in any manner suitable to requirements of the Insured subject to liability that company not being thereby increased) must be commenced and carried out with reasonable despatch, otherwise no payment beyond amount which would have been payable if these Reinstatement Value Conditions had not been incorporated herein, shall be made.
2. Until expenditure has been incurred by the Insured in replacing or reinstating the property, the company shall not be liable for any payment in excess of the amount which would have been payable if these conditions had not been incorporated herein.
3. If, at the time of replacement or reinstatement, the sum representing the cost which would have been incurred in replacement or reinstatement, if the whole of the insured property had been damaged, exceeds the Sum Insured thereon at the commencement of any damage to such property by a defined event, then the Insured shall be considered as being their own insurer for the excess, and shall bear a rateable proportion of the loss accordingly.
Each item of this Section (if more than one) to which these conditions apply, shall be separately subject to this provision.
4. These conditions shall be without force or effect if –
a. The Insured fails to intimate to the company within 6 months of the date of damage or such further time as the company may in writing allow his intention to replace or reinstate the property.
b. The Insured is unable or unwilling to replace or reinstate the property on the same or another site.
No deduction for age
In terms of the above, insurers are liable for the cost or replacing or reinstating on the same site, property of the same kind or type, but not superior to nor more extensive than the insured property when new. No deduction may be made in respect of the age and/or condition of the damaged property as at the time of the loss unless the work of replacement or reinstatement is not carried out, in which case an indemnity settlement will apply.
Furthermore, until expenditure has been incurred by the insured in replacing or reinstating the property, insurers shall not be liable in terms of this condition for any payment in excess of an indemnity settlement, although this is not always strictly applied.
Condition of replaced assets
The Replacement Value Condition depicted in the Office Contents and Business All Risks Sections refer to the following:
The basis upon which the amount payable for a claim in respect of contents is calculated, shall be either the replacement of the contents by similar property in a condition equal to but not better or more extensive than its condition when new; or
The repair of the contents to a condition substantially the same as – but not better than – its condition when new;
Provided that if, at the time of replacement or repair, the sum representing the cost which would have been incurred in replacement if the whole of the contents had been lost, destroyed or damaged beyond repair, exceeds the Sum Insured at the time of the loss or damage, then the Insured shall be considered as being their own insurer for the difference, and shall bear a rateable proportion of the loss accordingly.
Calculating depreciation
Settlement in the event of a total loss will not attract depreciation unless, in the case of the Business All Risk Section, the Replacement Value Condition has not been elected, and the value will be based on similar property in a condition equal to, but not better or more extensive than its condition when new. Unlike the Reinstatement Value Condition Clause, no costs need to be incurred prior to settlement being based on replacement value.
Two sections of the Multimark III Policy, which appear to have escaped the inclusion of the aforementioned Reinstatement Value Condition Clause and/or Replacement Value Condition, are the Theft and Goods in Transit Sections respectively. Consequently, both sections are subject to an indemnity settlement, meaning depreciation is applicable.
