Strict Reinstatement Clause

Purpose

In replacement cost insurance, the indemnity typically exceeds the actual cash value of the damaged property by the so-called new-for-old uplift. The strict reinstatement clause is designed to prevent this additional benefit being diverted to other purposes: the policyholder receives the amount exceeding the insurable value (actual cash value) only once reinstatement or replacement of the property is actually secured, for example through a construction contract or purchase agreement.

Effect and limits

Until reinstatement is secured, the insurer initially pays only the actual-cash-value portion; the new-for-old uplift follows only on proof that reinstatement is secured. If the property is not reinstated or replaced within a reasonable period for reasons attributable to the policyholder, any uplift already paid must be repaid, less the actual cash value. The clause thus protects the purpose of replacement cost insurance without withholding the actual-cash-value indemnity from the policyholder.

Negotiation and practice

In private residential buildings insurance, the strict version has become rare and is usually replaced by the simple reinstatement clause or automatic payment on a credible statement of intent to reinstate, so as not to burden customers with pre-financing obligations. For commercial risks with a high replacement-cost element, such as specialised machinery, the strict variant is still used to avoid perverse incentives not to reinstate.