Claim Settlement under Fire Insurance

 Fire & Special Perils Insurance policies are generally issued with Reinstatement Value clause. 

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.

 In R.I. policy monetary claim is to be paid only after actual repairs / replacement of parts / reinstatement has been completed and then payment shall be made for claims made by the insurer, as per terms and conditions of relevant policy.

The important aspects to be borne in mind by the insured that the insured has the option to reinstate or not and the said option has to be exercised within 6 months of the damage or any further time limit which may be allowed by the insurer in writing.

The reinstatement may be done at the same site or at any other site.

The reinstatement has to be completed within 12 months of the date of damage. Extension of time, may be allowed by the insurer.

 For damage to repairable property, the full cost of repairs including replacement of parts would be payable without deduction of any depreciation, subject to the repairs / replacement of parts are of the “same kind or type.”

1.     Buildings

The amount payable would be the cost incurred for reinstating or replacing a new building in the place of the building destroyed. The cost incurred would include the cost of materials used in the construction, the labour charges, the architect fees and other technical charges.

Example

Assuming that the replacement cost would come to say Rs.6 lacs. If the market value of the building destroyed is assessed after considering the state of maintenance of the building, its wear and tear and the use to which it was put, it would amount to Rs. 4 Lacs. Thus the amount payable had the policy been on the ordinary indemnity basis would be as follows:

Cost of building as new	RS. 6 lacs
Less: say 33 1/3 % depreciation	Rs. 2 Lacs
Depreciated value (market value)	Rs. 4 Lacs

 

Rs. 4 lacs is payable under normal indemnity basis.

Rs. 6 lacs is payable under Reinstatement value basis.

The “words of the same kind or type but not superior to or more extensive than the insured property when new as on the date of loss” mean that if the new building covers a larger floor area or is of superior construction than the one destroyed, i.e., employing materials of superior quality or durability or higher cost. If any betterments accrue to the insured under the above factors, he / she is required to make his / her contribution to the cost of betterments.

If there is partial damage to the building, the policy would pay the cost of repairs, the depreciation factor being totally ignored.

  2.     Plant and Machinery

The amount payable represents the cost of reinstating or replacing the new machinery of the same kind and type of the machinery destroyed but disregarding depreciation suffered by the machines up to the time of loss. The amount payable would be the delivered cost at site plus incidentals for civil work etc. Delivered cost would constitute, usually, CIF cost of new similar machine plus duty, if any, installation charges and incidentals like octroi, transport etc.

In other words, the amount payable represents the fully re-erected value of the machine at the time of erection.

Loss assessment has to take into account, the specific terms, conditions, etc., covered under “add-on” covers and special policies (e.g., Reinstatement value, Declaration etc.) under the fire policy for computation of claim amount. 

Method for Computation of Loss

The rule of “DESAFER” is followed to ensure a standard rule for computation of loss.

DE	Depreciation
S	Salvage
A	Average or Under Insurance, if any
FE	Franchise / Excess (whatever is applicable)
R	Reinstatement premium

 

While computing net payable amount, deduct depreciation first from the gross assessed loss followed by deducting Salvage, Underinsurance, excess as application and finally the Reinstatement premium. In case this sequence is altered, the net payable loss would also change which may lead to disputes.

(Reference Publication: IC-56 Of Indian Institute of Insurance)

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