This article forms part of our insurance glossary and how-to series.
Have you ever heard of Reinstatement and Day One Basis of Cover?
- What is Reinstatement Basis of Cover ?
- What is Day One Reinstatement Basis of Cover ?
- Is Day One Reinstatement more expensive ?
- Why choose a Day One Basis ?
- Example of calculating a Day One Sum Insured
The most common method of insuring commercial buildings is on a Reinstatement Basis.
Cover is determined by the cost of repair or reconstruction at the time of loss as opposed to at the start of the insurance period.
This will most likely have increased during the policy period as a result of construction cost inflation.
The selected Sum Insured therefore must include an allowance for this inflation, not only during the period of insurance but also during the rebuilding period.
A loss may not occur until very well into the policy period, possibly almost at expiry so it is vital that the selected Sum Insured allows for the potential of an extended period of reinstatement.
Under the Day One Reinstatement Basis the Sum Insured is declared as at the first day of the insurance and an inflation provision is then chosen to reflect the affect of inflation.
The initial Day One Declared Value must be accurately set, sometimes following a professional survey otherwise the base figure may be incorrect.
The premium for the inflation provision is much lower in percentage terms than the actual band itself and therefore offers a very economical method of providing the extra cover.
As an example the rate charged for a 25% inflation provision may be around 5% of the full rate.
This is one of the most economical and safe ways to avoid under insurance and the application of Average which may effect a claim settlement.
In this example there will be two elements:
a) the declared value – the cost of rebuilding the property including any associated costs such as debris removal, professional fees and VAT on day one of the policy period.
b) the inflation provision – the percentage uplift sufficient to take into account inflated construction costs both during the policy period and beyond to cover the rebuilding period.
Rebuildings costs on day one £38,000
Debris Removal £1,800
Professional Fees £4,500
Public charges £1,700
Declared Value £46,000
Inflation during 12 months £1,500
Inflation during design and planning £2,000
Inflation during construction £4,000
Total Sum Insured £53,500
On the policy schedule you would probably see the Sum Insured first £53,500 with the Declared Value in brackets (£46,000)
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