Reinstatement of any property generally means replacement of what is lost or repairing the damaged property by bringing it to its original value and usefulness. In case of total destruction of an asset, the company generally replace the same with new assets or if possible, repair the old one to bring it at the same conditions or positions that it never damaged. In case when assets under damage have been covered with an insurance policy then insurer try to repair damaged assets to bring them in their condition before the peril or risk.
The term “reinstate”, in a Fire Insurance Policy refers to buildings and the terms “replace”, refers to goods which have been completely destroyed. But we generally use term “restoration “which has combined effect of “reinstatement “as well as “replacement”.
Normally insurer indemnify the insured of the loss suffered by him, but the insurer with the consent of the insured can take recourse to reinstatement.
Leppard Vs. Express Insurance Co. it was held that the assured has not right to compel the insurer to reinstate nor does the insurer has a right to compel insured to apply the amount of indemnification flowing from the insurance policy to reinstatement.
Generally, an insurer discharges its liability as;
1. Compensate the insured by payment of damages for his loss;
2. Restore the subject matter of insurance to its earlier conditions.
In both way an insurer will discharge its liabilities and in case of fire policy there is a condition on due to which an insurer has right to repair the subject matter and brought the property to its conditions before fire.
Anderson Vs. Commercial Union Assurance Company the reinstatement has been defined as “the restoring of the property insured to the conditions in which it was immediately before the fire , in case of total loss by rebuilding the premises or replacing the goods by an equivalent , as the case may be , and in the case of partial loss by executing the necessary repair.”
Note: if it is specifically mentioned in the insurance policy then only an insured can demand reinstatement or otherwise the insurer is only liable ton indemnify in money only. In case of insurer also, it cannot force for reinstatement, if the terms of insurance policy provide other method of indemnification.
Once the insurance money has been paid to the insured, he cannot be compelled to spend the some received on reinstatement of property damaged or subject matter of insurance, except as required under section 76(f) of the Transfer of Property Act, 1882.
Section 76 of Transfer of Property Act, 1882 provides that;
Liabilities of mortgagee in possession. —When, during the continuance of the mortgage, the mortgagee takes possession of the mortgaged property, —
(f) where he has insured the whole or any part of the property against loss or damage by fire, he must, in case of such loss or damage, apply any money which he actually receives under the policy or so much thereof as may be necessary, in reinstating the property, or, if the mortgagor so directs, in reduction or discharge of the mortgage-money;
The insurer can insist on the right of reinstatement only under any of the below mentioned conditions;
1. Where the reinstatement is one of the conditions of the policy;
2. Where it is suspected that the loss is caused by the wilful or fraudulent acts of the assured;
3. Where they are bound to reinstate as a request from any person other than assured, who is interested in the subject matter of the insurance.
The policy of insurance generally gives the insurers an option of reinstating the property damaged or destroyed instead of making a payment in money. This clause enables the right of an insurer to reinstate the property in lieu of payment of money. But there are some cases in which the cost of reinstatement may increase sum insured. The main purpose of a fire policy is indemnification of insured against loss suffered in the peril and payment of money. The reinstatement clause in the fire policies are included for the benefit of insurance companies and this clause does not change the nature of fire policy.
When an insurer elects to reinstate, they in fact, substitute one ode of discharging their obligation for another and thus they put themselves in the same position as if they have originally contracted to do so. If one of the parties to a contract stipulated for the option of performing his part in one of the two lawful ways, he is, after having once made his election bound by such election and if the performance be impossible and not illegal, he is liable for the damages for not being able to perform it.
Lets’ suppose a building is completely destroyed by fire, it is not expected of the insurer that their duty of reinstatement should be literally fulfilled and that the minutest details of the building should be restored. They are only bound to put the house substantially in the same state as before the firs. If the insurer does not reinstate properly the assured is not bound to accept the building. They cannot put what they like in lieu of the building destroyed, but must put it up as it was before.
Suppose an insurer elect’s mode of reinstatement of a destroyed or damaged building and local authority has raised objection and stopped construction or reinstatement of that building. In this case the insurer will become liable to pay damages to the insured.
Note: if an insurer does elect to reinstate and a fire occurs during reinstatement, it would seem that the company are their own insurers till the reinstatement is complete and must commence reinstating de-novo and cannot charge the assured with the cost of second fire.
Conclusion: from above we find out that in case of a fire insurance they are two options with an insurance company, i.e. payment of amount of claim in money or reinstate the property destroyed. The insurance companies for their benefit put reinstatement clause in policy document, but true nature of fire policy is to indemnify the insured by way of money against damage or loss of subject matter of insurance. In many cases the reinstatement value increases the sum insured and insurers are liable to pay damages. Thus is in the betterment of insurance companies to determined best options for themselves ,while choosing right mote of discharging their liability.
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