Insurance Reinstatement

Article byPrakhar Gajendrakar
Edited byCollins Enosh
Reviewed byDheeraj Vaidya, CFA, FRM

Insurance Reinstatement Meaning

The insurance reinstatement clause allows policyholders to reset their insurance after applying for a claim. This clause allows policyholders to claim a second application when one insurance claim is pending. Typically, insurance companies do not volunteer such clauses. Policy buyers must opt for a reinstatement clause before signing the agreement.

Insurance Reinstatement

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Policyholders can use the reinstatement clause to restart the insurance if they miss periodic insurance premiums. In the absence of the clause, policyholders pay a hefty reinstatement fine and administrative expenses to restart the coverage. Even beyond the grace period, if policyholders default on periodic payments, the policy is terminated.

Key Takeaways

  • Insurance reinstatement is a clause in the policy agreement. It facilitates coverage restart if a policyholder defaults on a few premiums. It also covers liabilities occurring between an insurance claim and claim settlement.
  • When it comes to property damage, the term ‘reinstatement value’ refers to the cost of reconstruction mentioned in the insurance policy agreement. It is a predetermined value; if it is too low, policyholders cannot demand additional compensation.
  • The property’s market value is considered if the reinstatement value is not mentioned in the insurance agreement. The insurance company only pays the property’s market value in such scenarios.

Insurance Reinstatement Clause Explained

An insurance reinstatement clause is applicable when the policyholder faces consecutive accidents. This clause allows policyholders to claim a second application when one insurance claim is pending.

Before venturing further, let us define insurance first. Insurance is a contract where one party guarantees another party’s protection against losses resulting from specific accidents or other events. The main parties involved are the insurance company and the policyholder who receives insurance coverage in exchange for a premium.

Now, the term insurance claim refers to a formal request made by the policyholder. The insurance claim is an application for compensation against losses. But the policyholder receives compensation only if the insurance plan covers the claim. The terms are mentioned in the insurance policy agreement. The insurance company investigates the event; if the claim is approved, the policyholder receives payment. Usually, personal insurance covers life, health, properties, and automobiles.

The insurance reinstatement meaning highlights that the insurance becomes void if the policyholder defaults on periodic payments. But insurance companies allow a short window—a grace period of one month—to cover pending premiums, fines, or penalties. If the policyholder surpasses the grace period, the insurance coverage is terminated. Beyond six months (from the date of insurance policy termination), the policyholder has to start an underwriting process to reinstate the insurance policy.

It is very important to research the reinstatement clause before signing the insurance agreement. The insurance reinstatement fine varies between one insurance company and another.

More importantly, the insurance agreement is a complex document; it is highly recommended that a policyholder takes the time to understand various clauses. This way, bad faith disputes in claim settlements can be avoided. The reinstatement fine is fixed; it does not vary concerning market conditions.

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Insurance Reinstatement Value

In property insurance, the term ‘reinstatement value’ is an estimated cost of rebuilding an insured property. This estimate is independent of the property’s market value. Therefore, it is also called the reinstatement cost. It accounts for all the associated expenses—demolition expenses, site clearance, and rebuilding costs.

For example, the insurance company will pay the reinstatement value if an individual insures their home with a fire policy and the home catches fire. This compensation helps the policyholder either repair or rebuild the entire house. These claims are complex; policyholders should carefully research the clauses and terms.

Typically, the insurance company asks the policy buyer to declare a property’s reinstatement value. Based on the stated values, the insurance premium is decided. If the predetermined reinstatement value is too low, the policyholder cannot demand a higher amount during claim settlement.

Examples

Now let us look at insurance reinstatement examples to understand the procedures better.

Example #1

Dakota lives with her husband in New York. She has insured her car by purchasing a policy. While coming home late one night, Dakota met with an accident. Her car is damaged. She files for an insurance claim. But her younger son crashed the same car again when the claim was settled.

Luckily for Dakota, she was careful during the policy purchase. She specifically asked for a reinstatement clause and made sure it was added. Thus, Dakota can claim compensation for both accidents. Without a reinstatement clause, the policy would have become null and void—insurance coverage would not apply to the second accident.

Example #2

Ebenezer was undergoing financial hardships. As a result, he could not cover home insurance premiums. The insurance company did try contacting Ebenezer, but he was not available. Usually, insurance policies are terminated in such a scenario. But at the last moment, Ebenezer met the insurance provider and explained the situation.

The insurance agreement showed a reinstatement clause; Ebenezer drafted an insurance reinstatement letter and sent it to the insurance company explaining his situation. As a result, the insurance provider extended a grace period of 30 days to clear all outstanding dues.

But beyond the grace period, there will be no leeway. If Ebenezer fails to pay the periodic premium again, the policy will be terminated permanently.

Insurance Reinstatement Value vs Market Value

Now, let us look at insurance reinstatement value Vs market value comparisons to distinguish between the two.

  • When it comes to property damage, the term ‘reinstatement value’ refers to the cost of reconstruction mentioned in the insurance policy agreement. In contrast, the market value of a property is adjusted for depreciation. Some property insurance policies have market value clauses.
  • If the policy terms mention reinstatement value, the insurance company will indemnify for the reconstruction cost. If the terms do not mention any preterminal value, the insurance company will pay compensation that equals the property’s market value. It is important to note that the market value is not the same as the property’s actual value. This is because the insurance company deducts depreciation from the compensation.
  • For policyholders, a set reinstatement value is better than market value clauses. This is because the reinstatement value does not account for depreciation.

Frequently Asked Questions (FAQs)

1. What is the insurance reinstatement procedure?

It is mentioned in the policy agreement; for clarity, policyholders can contact the insurance company. Either way, policyholders must start the process straight away. Too much delay can lead to policy termination.

2. When can an insurance company refuse to reinstate?

The company can refuse if a reinstatement clause is not mentioned in the policy. If the policyholder encounters a second accident or encounters an accident after policy termination, then the policyholder receives no compensation.

3. How long does reinstatement take?

Typically, insurance companies offer 30 days (one month), also known as the grace period. The policyholder must clear all outstanding dues within the grace period. If not, the policy will be terminated and considered null and void.

This has been a guide to Insurance Reinstatement and its meaning. Here, we explain it in detail with its example, value, and comparison with market value. You can learn more about finance from the following articles –

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