20/12/2021
What is Day 1 Reinstatement?
When insuring property, you want the reassurance of knowing your property can be repaired or rebuilt should anything happen to it. Understanding the intricacies of your policy is the best way to guarantee that – and knowing whether you have a Reinstatement or Day One Reinstatement policy is vital. Both are common options but it’s easy to misunderstand the subtle differences between the two.
Let’s take a closer look…
Reinstatement Policies
A Reinstatement policy seeks to fully cover repair or rebuild costs if a property is damaged or destroyed. The sum insured/declared value should be set at an appropriate level when the policy starts.
In the event of a claim, the maximum pay-out is that insured sum, which should cover the rebuild costs. However, because a rebuild can sometimes happen months or even years after setting the insured sum, there is an element of guesswork in that original figure. You may, for instance, find that you’re underinsured because materials have increased in price.
Got that?
Now, let’s add averages…
If the sum insured is within 85% of the value declared by a loss adjustor at the time of the claim, then no average is applied. The insurer will cover the full rebuild cost in spite of the underinsurance.
However, if you’re more than 15% underinsured, the claim will be reduced proportionately.
Put simply: Reinstatement policies allow you to be 15% underinsured with no penalty. That is providing that the value initially declared is adequate and also ideally backed by a RICS insurance reinstatement valuation and with index-linking added each year.
However, there is no cost protection against inflationary increases during a Reinstatement policy’s length. The maximum pay-out remains the original sum insured at the start of the policy or renewal. So if the price of building materials and labour increases during the course of your policy, these cost factors won’t be taken into account. The sum insured remains the same, which means you could be underinsured without realising it.
However, it does mean that these policies tend to be slightly cheaper. Plus, this policy type might be preferential when there’s low inflation.
To complicate matters even more, you can choose to insure on a Reinstatement basis, but opt to uplift the sum insured. This means you have an extra buffer – say 15% – to cover unpredictable changes, such as inflation. This could even help with other unforeseeable delays, such as problems with listed status, properties having restricted access or needing rare or precious materials for the repair works. The latter scenario has become more frequent with both Brexit and COVID affecting the supply of materials.
Day One Reinstatement
Day One Reinstatement will also see an insured sum set at the outset. But, in this instance, the maximum pay-out is the sum insured plus the chosen Day One uplift – normally 15% or more.
The main drawback of Day One Reinstatement is that it tends to cost more. Plus, if there is underinsurance, there is no wriggle room. The claim settlement will be proportionately reduced by the amount of underinsurance. If you are 15% underinsured, for instance, the claim payout will be reduced by 15%.
But, in contrast to Reinstatement, this policy type can offer some protection against inflation-linked price increases during the policy or rebuild period. The declared value needs, however, to be adequate and ideally supported by a RICS insurance reinstatement valuation.
Provided the sum declared for insurance is suitable to start with, a Day One basis tends to pay out for total loss scenarios rather than partial loss.
Claims example
A building would cost £1,000,000 to rebuild but is insured at £900,000 on a Day One basis with up to 30% uplift.
The property suffers damage of £500,000 after 6 months.
Building inflation is at an annual rate of 3%.
The loss adjustment calculation would be as follows:
Rebuild cost = £1,015,000 (£1m x 3% x 6/12ths).
The insured sum of £900k is divided by rebuild cost of £1m (i.e. the sum insured is 90% of the rebuild cost) and multiplied by the partial loss of £500K = £450K.
In this instance, a Reinstatement policy is preferable. The loss is within 85% of the sum insured and the full £500k would be paid, instead of the £450k paid with Day One basis.
Need help understanding your Property Insurance?
As an independent insurance broker, not only can we ensure that you have an appropriate policy in place but can explain the finer details, so you have complete peace of mind. Simply give us a call on 01603 760511.
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