Situation is a term commonly used in insurance policies to refer to the specific location of the insured assets. The insured may have many situations covered by the same insurance policy.
Declared value and sums insured are terms used to describe the sum total of all property insured at each situation declared by the insured and calculated in accordance with the basis of settlement including foreseeable expenses such as fees associated with planning, architects, surveyors, consulting engineers, legal advisors, etc.
Indemnity value is the cost necessary to replace, repair and or rebuild the asset insured to a condition and extent substantially equal to, but not better or more extensive than, its condition and extent at the time that the damage occurred, taking into consideration the age, condition and remaining useful life of the asset.
If the basis of insurance under the policy is indemnity value or, in the event of a loss under a replacement value cover, if the insured elects not to replace/reinstate or repair the asset, then the insurer may make a payment on the basis of the indemnity value of the asset(s) at the time of the loss.
Reinstatement cost is typically defined as follows: Where property is lost or destroyed, in the case of a building, the rebuilding thereof, or in the case of property other than a building, the replacement thereof by similar property in either case in a condition equal to, but not better or more extensive than its condition when new. Where property is damaged: the repair of the damage and restoration of the damaged portion of the property to a condition substantially the same as, but not better or more extensive than its condition when new.
Extra Cost of Reinstatement
Policies for buildings and site improvements typically extend to include the extra cost of reinstatement of damaged property to comply with the requirements of building regulations in place at the time the loss occurs. This extension is typically subject to the following provision:
The amount of the claim cannot include the cost of complying with a requirement which existed prior to the loss occurring and with which the insured was required to comply.
As a general rule the insurer will only insure the assets as they exist, not as they may be replaced. The reason for this is the incidence of a partial loss where repairs are made to the existing structure. However, it may not be possible to reinstate an existing structure following a loss because it no longer complies with current building and fire regulations or other statutory encumbrances.
Insurers therefore allow the insured to insure for the extra costs associated with complying with these regulations.
Co-insurance clauses provide that, if at the time of the loss the value of the property insured exceeds the amount of cover, the insured is considered to be self-insuring for the difference in value and therefore bears a rateable proportion of any loss (including a partial loss). This process of sharing a rateable proportion of the loss is also referred to as averaging.
Industrial Special Risk (ISR) This policy is common for commercial/industrial insurance. It typically addresses many areas in addition to buildings and contents. This policy is most commonly offered on the basis of reinstatement cost and/or indemnity value, however, other valuation bases such as reproduction cost or replacement cost can also apply.