In the context of Property Insurance distinguish between the following bases for cover and discuss the
In relation to property insurance, there are many methods in which cover can be arranged. The basis, on which insurance is covered, is very important in determining how much the insured will be paid in the event of a claim. A contract of property insurance is a contract of indemnity. ... Cover on an indemnity basis signifies that if a loss occurs, the insurers undertake to place the insured after a loss, in the same financial position they were in, immediately before the incident took place. ... Subsequently the insurers are obligated to pay the insured the value of the property, which is destroyed, or for the exact cost of restoration if the property has not been completely damaged and hence is not beyond economic repair. ... Thus ‘indemnity is based on the insured’s pecuniary interest in as much of the subject matter of the insurance as has been lost.’ The importance of this basis is evident as if the insured could recoup more than a true indemnity; he has an incentive to destroy the property in order to make a profit. ... As cover on an indemnity basis may not provide adequate money to restore the property in the event of damage, this may result to the insured being ‘out of pocket’. Conversely, cover on a Reinstatement basis or ‘new for old’ policies, pays for the full cost of rebuilding and makes no deductions for betterment. Where total loss has occurred cover on this type of basis is carried out by rebuilding the premises or replacing the goods by similar goods and in the case of a partial loss, reinstatement is made by carrying out the necessary repairs. ... Premiums for cover on a reinstatement basis are in general, higher in comparison to cover on an indemnity basis, as it insures the full cost of rebuilding as ‘new’, making no reduction for wear and tear In addition to covering the cost for rebuilding as ‘new’, this basis will cover the additional costs, which the insured may encounter through the course of restoration as a result of conforming to new regulations. ... In cases where it is not practical to rebuild in its initial form, the valuation of the property will be based on the cost of acquiring a similar building in terms of size and utility. ... The money received from the insurers, must be used to rebuild, otherwise the cover will revert back to a simple indemnity basis allowing for reduction for wear and tear to be made. ... Cover on a reinstatement basis is usually arranged for plant machinery, buildings and other content insurances where wear and tear is likely to happen. ... Consequently in the cases mentioned above, cover on this type of basis would not leave the insured ‘out of pocket’. Conversely rebuilding and the making of wear and tear are not generally applicable with regards to stock, where cover on an indemnity basis is deemed to be more appropriate as the amount the insured paid for the stock would be repaid.