Reinstatement under policy

Reinstatement means the restoration of the property insured to the condition in which it was in immediately before its damage or destruction. For example, a total loss is made good by rebuilding the premises or replacing the goods with similar ones. In case of the partial loss, reinstatement is made by undertaking the necessary repairs.

The insurance policy is evidence of contract to pay money and money only, in settlement of a claim. The insured cannot compel insurers to reinstate the property. In the same way, insurers cannot demand that the insured spend reinstatement the money which they have received in settlement of a claim.

In this respect, the Insurance Act provides that an insurer shall not in any circumstances be bound or concerned to see to the application of any moneys paid by the insurer in respect of any policy.

There are occasions however, when the insurer will choose reinstatement as a method of providing indemnity. The main ones are:

• When an insured proves difficult in negotiations for cash payment, especially where the insurer finds out that they could reinstate for less than what the insured is demanding.
• Where there are circumstances that may led to the insurer to suspect that the insured may have caused the loss in an effort to get some cash payment from the insurer but where the does not have enough proof. In this case, the insure may opt for reinstatement in an effort to defeat such negative intentions of the insured.
• Where the insured proves difficult to be dealt with., the insurer may may decide on on reinstatement so as to bring them to more sober position.
• Where two or more companies insure the same property. A joint reinstatement may be the option to take. If the policies insuring the same property are in different interests, the condition of contribution cannot arise and, to ensure settlement equitable to the parties, reinstatement may be the only practical solution.
• The right of reinstatement is often exercised with jewellary and other valuables where the insurers can make direct purchase of the replacement item and obtain a discount on the prices

The reinstatement conditions it nth standard fire policy reads as follows;

“If the company erects or becomes bund to reinstate or replace any property, the insured shall, at their own expense, produce and give to the company all such plans, documents, books and information as the company may reasonably require. The company shall not be bound to reinstate exactly or completely but only as circumstances permit and in reasonably sufficient manner and shall not in any case be bound to spend in respect of any of the items insured more than the sum insured thereon.”

The operative clause of the policy allows insurers the option to reinstate, and this condition provides for the rights they will have if they exercise that option. Otherwise the contract remains one to pay money unless the insurer decides to reinstate. The correction of this position is for the insured to consent to the method of indemnity the insurer has chosen.

If the insurers expressly notify the policyholder that they intend to reinstate, their intention will have been quite clear. If the insured is led into thinking that the insurers intent to to reinstate then they should be able to insist that the insurers do so.

Once insurers elect to reinstate, the contract then becomes one to reinstate the property insured instead of one pay a sum of money and the reinstatement must be made adequately.

Reinstatement applies not only to building but also to goods. It’s possible to reinstate goods without a problem. However, for a building, it’s not possible to restore every minute detail but the restored building should be substantially similar to the building.

It is important to note that their difficulties associated with reinstatement and insurers exercise this right they sparingly because;

• Insurers cannot withdraw if they decide to reinstate.
• The application of average becomes impossible
• It’s easier to give a monetary settlement
• The insurer will be responsible for the way the work is done
• The work cannot be left incomplete because a sum of money equivalent to the sum insured have been expedited in the reinstatement.
• The insured can question how the money has been expended
• Insurers become their own insurers during re-construction when they opt for reinstatement.

The reinstatement condition has a requirement that the policyholder must, at their own expense, produce plans, documents books and information that the company may reasonably   require in order to effect reinstatement. It also provides that the insurer will bear the cost of reinstatement in full without any deduction for wear and tear. It also requires the insured to facilitate the work of reinstatement and not to interfere with the insurers or prevent them from carrying out the work. If the insured declined the insurers to enter their land, this will frustrate the implementation of the reinstatement and consequently bring to an end the insurers obligations.

Reinstatement Memorandum

 Reinstatement Memorandum is a policy extension which can be granted at the request of the insured and provide that the insurer will bear the cost of reinstatement in full and without deduction for wear and tear. It is normally applied to insurance of building, machinery and other properties but not stock. Stock is insured under a declaration policy

This extension provides for payment to be made which is equivalent to the cost of reinstatement to a condition equal to, but not better or more expensive than that of the property when it was new. The reinstatement should be done on the same or or another site site and should be in a manner suitable to the requirements of the policyholder provided that the amount the insurer is required to pay is not thereby increased.

However, some limitations apply:

• The work of reinstatement must be carried within a reasonable time frame
• Where there is partial damage only, the maximum liability of the insurer is the estimated cost of reinstatement of the damaged part estimated but taking into account what it would cost if the whole of the property insured had been destroyed.
• The cost of reinstatement must have been incurred if the benefit of the extension is to be obtained. This may happen where the insured gives an irrevocable order for the replacement of an insured item and the insurer accept this as an incurred cost subject to the next requirements
• It may be provided that average will apply if the sum insured is less that 85 percent of the full reinstatement value of the insured property at the time of reinstatement. This means that if reinstatement is not carried out at the time of reinstatement. This reverts the ordinary indemnity basis and 100 percent average is applied to the sum insured on the basis of the value at risk at time of the loss.

Reinstatement Ancillary Clauses

If a full indemnity has to be achieved, there are factors which should be taken into account in respect of reinstatement insurances. These must be incorporated into a policy by specific clauses:

Public Authority Clause

 A typical wording of the clause reads;

“the insurance by this policy extends to include such additional costs of reinstatement as may be incurred solely by reason of necessity to comply with building or other regulations issued by public or county authorities in pursuance of ant Act of Parliament or with by laws of any county authority”.

It however does not cover liability for additional loss due due to non- compliance of such regulations, damage done before the extension was given, notice served upon the insured before the damage occurred, undamaged property or part of the property unless the insured had agreed to include such property.

Professional Fees Clause

Following a loss, the insured may require the services of such professional as architects, surveyors and consulting engineers whose services are essential for reinstating or repairing the damage, following u plans, preparing specifications of tenders and the like.

The fees are normally applicable to building and contents but excludes stock. Fees should be in accordance with current scales of charges for appropriate professional bodies.

Debris Removal Clause

It is necessary to clear debris from removal before the work of reinstatement or repairs can be carried out following damage. In normal circumstances, the cost involved is included in the cost of rebuilding, subject to adequacy of sum insured. There are instances, however where the removal of debris would not be covered by the fire policy. Examples

• Cost of dismantling or demolishing
• Where debris might have fallen on to an adjacent roadway or into a river.
• For stock such as metals, wax and plastics, they might have melted during the fire and subsequently solidified, – hence requiring extra cost of removal
• Shoring or propping of the portion of property insured or destroyed or damaged by insured peril.

Possible Effects of Inflation on Reinstatement

When a material damage policy is arranged on indemnity basis, provision should be made for inflation by selecting a figure for sum insured which will prove adequate even if a loss occurs on the last day of the policy. It is important that a reasonable figure is selected if the negative effect of the operation of average are to be avoided.

It’s possible to adjust such a figure during the currency of the policy and if it becomes clear that the sum insured may not be able to meet this requirement. However, as a rule, the sum insured should always be reviewed at the time of renewal and its adequacy ensured while taking into account the prevailing inflation rate and expected future trends.

 The insurance company has come up with direct methods to deal with these issues. The common schemes are;

• Escalator or appreciation in value clause
• Day – one basis of reinstatement cover
• Declaration basis insurance

Escalator or Appreciation in value clause

 This clause is designed to cushion the insured against future inflation, by providing for automatic increases in the sum insured subject to an additional premium being paid by the insured. It helps to avoid the need for frequent instructions being given for increasing the sum insured during the term of the policy. It also reduces the necessity to insure for a high amount of sum insured at the commencement of the policy as this would involve the payment of higher premiums that would be necessary.

For example

Suppose the annual rate of inflation will be 10 percent, the clause states that during the period of insurance, the sum insured will be increased by that proportion of the specified percentage with the number of days, since the commencement of such period bears to the whole period. the additional premium is calculated at 50% of the premium arrived at by applying the rate to the annual increase.

Sum insured……………………………………………KES 20,000,000

Escalation percentage (inflation rate………10%

Premium rate……………………………………………5%0

By the end of the year, the sum insured will increase by 10% i.e.  the insured is covered up to Ksh. 20,000,000+(Ksh 20,000,000×10/100)

=KES 22,000,000

The premium charged is as follows:

KES 20,000,000×5/1000 =KES 100,000

The premium increased to:

KES 100,000+(50/100*20,000,000*2/1000)  = KES120,000

The following points should be noted:

• The clause applies to building and / or content but not stock, as this is catered for by a declaration policy.
• There is usually no return of premium if anticipated rate of inflation is not reached.
• At renewal, the insured and insurer should agree on revised sum insured and the inflation rate to apply. Unless amended, the existing percentage increase will apply to the period of insurance from renewal.
• The pro rata daily method of the operation of the clause may particularly during the early stages of the period of insurance, make it inadequate to deal to losses.
• No provision is made for the continuing effect of inflation after the date of loss on reinstatement of the cover.
• It is a supplementary safeguard against unexpected or exceptional inflation and not a substitute of normal assessment of adequacy of sum insured.
• A regular review of the sum insured may prove more accurate and less costly than perhaps unnecessary high escalator percentage.

Day-one Basis of Reinstatement of Cover

 This is a method used by insurers especially in fire insurance, to provide reinstatement cover with an allowance being made for inflation from day one of the insurance period. i.e. from commencement date of the cover. At the inception of each period of insurance, the insured declares the full reinstatement value of the subject matter of insurance. this would be adequate; otherwise average provisions will come into operation.

This is done at the level of costs applying at the inception of the period(day-one) of insurance but without provision for inflation which may operate subsequently. This declared value must be notified to the insurers at the commencement of insurance and at each subsequent renewal.

The second part of the sum insured is an added provision not normally for inflation which may operate subsequently. This declared value must be notified to the insurers at the commencement of insurance and at each subsequent renewal.

The second part of the sum insured is an added provision not normally exceeding 50% of the declared value, to cater for increases in the course of insurance period

Average applies only to declared value and is essential in that, this adequately covers the cost of reinstatement at the commencement date or subsequent renewal sate since the provision of inflation will not make good any initial underinsurance.

There are two approaches in calculating premium. The first one is a nonadjustable basis, in which case, it is calculated by applying the declared value normal terms loaded by 15% of the premium.

The second method is where insured may select insurance on the adjustable basis under which a provisional premium is charged by applying to a declared value normal terms loaded by 7.5 percent.

Declaration Policies

Declaration policies apply to stock insurance only are intended to give maximum cover and at the same time, avoid over insurance as it leads to excessive premium payment.

A policy is issued for an amount estimated to represent the maximum sum likely to be at risk during the year. Insurers will charge a provisional premium amounting to 75 percent of the premium on the maximum sum at risk. The insured is expected to declare at agreed intervals usually one month- the value at risk on a certain day.

On expiry of the period of insurance, the actual premium is calculated on the average of the declarations made. And an additional premium is charged or a return of premium is allowed.

Example

Maximum sum at risk                                 KES 10,000,000

Premium rate                                               2%

Provisional premium                                   KES 10,000,000   ×   2    × 75

                                                                                                       1000     100

                                                                           =KES 15,000

Monthly declarations

Month                                                KES

January                                              8,000,000

February                                             7,000,000

March                                                  7,500,000

April                                                      10,000,000

May                                                      9,000,0000

June                                                      8,000,000

July                                                       7,000,000

August                                                 7,000,000

September                                         8,000,000

October                                               No declaration, therefore take KES 10,000,000

November                                          9,500,000

December                                          8,500,000

TOTAL                                                 99,500,000

Average declaration   = Total declaration

                                       Number of declarations

= KES   99,500,000

              12

= KES 8,291,667

Actual premium = KES 8,291,667 × 2              

                                               1000                            = KES 16,583

Provisional premium paid   = KES 15,000

Additional premium             = KES   1,583

Note:

Where no declaration is received, the maximum sum insured is applied,

Likewise, if the declaration exceeds the maximum sum insured, the sum insured applies

If declaration exceeds the the sum insured on regular basis. This should be queried with the insured with a view of increasing the same so as to bring it closer to reality.

Stock Maximum Value Basis

The major challenge with declaration approach is the difficulty in obtaining declarations on time from the insured as per the policy terms. Many insureds are unable to do this. A more simplified approach is what is commonly referred to as stock maximum value basis.

Under this method the proposer has to fix their stock sum insured at a level which reflect the maximum value at risk at any time during the period of insurance. The insurer then agrees that the sum insured can vary by an agreed amount usually 20% but without taking monthly declaration necessary. the sum insured should be reviewed regularly to ensure its adequacy. Average applies in case of under-insurance