Reinstatement Value Policy
New for old, without depreciation, as long as the insured actually rebuilds.
A fire policy on strict indemnity pays market value: what it would cost to replace the property new, minus depreciation for age and wear. For a 20-year-old dyeing machine that can leave a large gap, because the owner still has to buy a new machine to restart. A reinstatement value policy closes that gap. It pays the cost of replacing or rebuilding with new property of the same kind and capacity, without deducting depreciation.
It departs from strict indemnity on purpose (IC-01 covers the principle itself). IRDAI's 2024 master circular lists reinstatement value as one of the recognised bases of settlement and describes it as the indemnity amount without application of depreciation or underinsurance. Policy wordings still make full reinstatement cost the sum insured, and apply their underinsurance clause where it falls short (see the first condition below). Because the insured ends up with new for old, the insurer attaches conditions that make sure the money really goes into rebuilding.
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Market Value vs Reinstatement Value
What is paid
Market value basis
Replacement cost new minus depreciation
Reinstatement value basis
Cost of replacing or rebuilding new property of the same kind, not better or bigger
Sum insured should equal
Market value basis
Present depreciated value
Reinstatement value basis
Full current cost of reinstatement
Premium
Market value basis
On the lower, depreciated value
Reinstatement value basis
On the higher, new replacement value
Must the insured rebuild?
Market value basis
No: cash settles the claim
Reinstatement value basis
Yes: if not, the claim falls back to market value
Used for
Market value basis
Any property, including stocks
Reinstatement value basis
Buildings, plant and machinery, furniture and fittings. Never stocks
| Market value basis | Reinstatement value basis | |
|---|---|---|
| What is paid | Replacement cost new minus depreciation | Cost of replacing or rebuilding new property of the same kind, not better or bigger |
| Sum insured should equal | Present depreciated value | Full current cost of reinstatement |
| Premium | On the lower, depreciated value | On the higher, new replacement value |
| Must the insured rebuild? | No: cash settles the claim | Yes: if not, the claim falls back to market value |
| Used for | Any property, including stocks | Buildings, plant and machinery, furniture and fittings. Never stocks |
The Conditions of a Reinstatement Value Clause
The wording below follows one insurer's current Bharat Sookshma policy, which settles building, plant and contents on reinstatement value as standard. Older SFSP reinstatement clauses follow the same pattern.
- 1
Insure for full reinstatement cost
The sum insured for each item must be enough to reinstate it on the date of loss. If it is not, average applies (subject to whatever underinsurance waiver the policy grants).
- 2
Start within a reasonable time
Repair or reinstatement must begin within a reasonable time after the damage.
- 3
Finish within the time limit
Work must be completed within 12 months of the damage, or such further time as the insurer allows in writing.
- 4
Otherwise, market value
If the insured does not start or finish in time, or chooses not to reinstate, the claim is paid on market value.
- 5
Law prevents rebuilding
If municipal or other law stops reinstatement, the claim is again settled at market value, within the sum insured.
- 6
Another site is allowed
The insured may rebuild elsewhere, but the insurer pays no more than rebuilding on the original site would have cost.
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Why Stocks Are Never on Reinstatement Value
Stock is bought to be sold, not kept, so there is no depreciation gap to close. Stocks are insured on cost bases instead: raw material at landed cost at the premises, work in progress at input cost, finished goods at manufacturing cost or at contract price for goods sold but not yet delivered. A Surat textile unit therefore has two bases on one policy: looms and the shed on reinstatement value, yarn and fabric on cost.
Two related points catch candidates. First, the SFSP's own condition giving the insurer the option to reinstate is not a reinstatement value policy: it lets the insurer choose to rebuild instead of paying cash, still on indemnity. Second, IRDAI's rule that an insurer must decide a retail claim within seven days of the survey report does not apply to property policies on reinstatement value basis, since the final amount depends on rebuilding.
How IC-11 Tests This
Expect "reinstatement value policies are never issued on which property" (stocks), "what if the insured does not reinstate" (market value), and the difference between depreciated and new replacement value in a short sum. The trap is the insurer's reinstatement option under the SFSP condition: that is a method of indemnity, not new-for-old cover.
FAQs
What is a reinstatement value policy in fire insurance?expand_more
A fire policy that pays the cost of replacing or rebuilding damaged property with new property of the same kind and capacity, with no deduction for depreciation, provided the insured actually reinstates it within the time allowed.
What is the difference between market value and reinstatement value?expand_more
Market value is the cost of new replacement minus depreciation. Reinstatement value is the full cost of new replacement. A machine costing ₹50 lakh new and depreciated 40% has a market value of ₹30 lakh and a reinstatement value of ₹50 lakh.
Can stocks be insured on reinstatement value basis?expand_more
No. Reinstatement value is for buildings, plant and machinery, furniture and fittings. Stocks are insured on cost bases such as landed cost or manufacturing cost.
What happens if the insured does not rebuild under a reinstatement value policy?expand_more
The claim is settled on market value, that is with depreciation deducted, as if the policy had been on indemnity basis.
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