Measure of Betterment in Reinstatement Basis of Claim Settlement

When dealing with commercial property claims most often the basis of settlement is reinstatement. is important the issues related to betterment are understood.

A contract of fire insurance is fundamentally one of indemnity, since its object is to make good, within the limits of the amount of insurance, and subject to terms and conditions of the policy, the actual loss sustained and nothing more.

An insurance policy providing reinstatement cover is basically a contract of indemnity. The addition of the reinstatement basis of settlement provides a means by which an indemnity will be calculated.

By definition, ‘Reinstatement value’ is the cost necessary to replace, repair, or rebuild the insured property to a condition substantially the same as, but not better or more extensive than, its condition when new provided the reinstatement is actually carried out.

In other words, damaged / destroyed / irreparable property to be replaced by new property of “the same kind or type but not superior to or more extensive than the insured property” and the monetary claim to be allowed on value as new basis without deducting depreciation.

An insurance policy covers the insured’s financial interest in the subject matter of the cover, not the item itself. So, if the damage to the item in question causes the insured no financial loss, there is no indemnity to consider, and reinstatement is an irrelevance.

Policy does not only insure property itself, but also the insured’s interest in the property and measurement of loss is the extent of such interest in property damaged or destroyed by an insured peril.

If a warehouse is destroyed, a building of modern steel frame may cost less to construct in comparison with the old one with brick walls and internal columns construction. By reinstating the property using modern methods, the insured’s financial interest is protected as the final result is an asset at least as valuable with equal utility than that which was lost.

In a situation where rectification works have improved a property or asset in some way (i.e. it is larger, newer or has an improved specification), the insurer will often claim that betterment has been obtained and that a deduction should be made in any award of damages.

There are three common examples of financial benefit obtained following rectification: -

·        The property or asset is improved, either because the replacement specification is enhanced,

·        The available products are superior, or

·        The lifecycle and maintenance requirements are improved.

For an award of damages to be reduced for betterment it is necessary to show that the claimant has received some form of financial benefit or advantage.

This same principle applies to machinery and contents – the insured’s financial interest in an item is whatever it does, not the machine itself.

Computers may be an excellent example, given the fact that new equipment is generally better and cheaper than the original. It would seem impractical to spend money on procuring an out-of-date specification of computer when, for far less, a more efficient and faster computer can be obtained. today.

It is the functionality that is important, but that can of course include reliability, quality and the like as all these things are relevant.

The basic principle remains however that the machine is the current equivalent in terms of its functionality – same capacity, output, quality of product, etc. as the original.

Comparison has to be made between the latest and the old machinery with regard to following aspects to assess for the deduction due to betterment.

▪ Higher output / productivity 

▪ Lesser manpower requirement 

▪ Lesser fuel consumption and operating cost 

▪ Additional range of function / compactness of machine, etc. 

If only an improved replacement can be obtained (the computer being a typical example) as the current nearest equivalent of the damaged machine, a suitable deduction will be made for the inherent improvements.

The following invaluable Publication has been referenced for this article:

“Reinstatement Basis of Settlement Practical Problems in Adjusting Losses by the CILA Property Special Interest Group”

The above interpretation is absolutely personal in nature and is not binding on any individual/ organization in particular.