Authored by Dr. Zhan Hao (firstname.lastname@example.org) and Song Yiqiu from AnJie Law Firm
Reinstatement Value Insurance is applied more and more in PRC insurance market. However, the Insurance Law of the People’s Republic of China does not specifically define the Reinstatement Value or how to apply the Reinstatement Value Insurance. This article pertains to briefly analyze the application of Reinstatement Value Insurance.
I. The Regulations of CIRC
In the Reply on Issues pertaining to Interpreting the Insured Value and Reinstatement Value (14 April 2000, Baojianfa No.9), China Insurance Regulatory Commission (“CIRC”) defined the Reinstatement Value (hereinafter referred to as “RV”) as the entire cost of purchasing or rebuilding the insured property that the applicant and the insurer agree to take as the insured value, which will further determines the sum insured.
Further, in the Reply on Issues pertaining to Determining the Insured Value (3 April 2007, BaojiantinghanNo.71), CIRC pointed out that the RV shall refer to the value or cost of reinstating the damaged property with the same or similar materials or qualities, and this is one of the methods to determine the insured value in property insurance.
Pursuant to the above replies, we find that the attitude of CIRC in 2000 is a little different from the attitude of CIRC in 2007.
In the reply of 2000, CIRC emphasized purchasing or rebuilding. According to the general understanding, such purchasing or rebuilding means to purchase or rebuild new insured property.
However, in the reply of 2007, CIRC emphasized the standard of reinstatement is the same or similar materials or qualities, which could be interpreted as to emphasize the principle of restoration as the past. Moreover, CIRC did not specifically point out to reinstate as the new condition in this reply, which could be interpreted as to conform to the principle of indemnity under the insurance law.
II. The Insurance Practice
In practice, the RV insurance would be applied if the insured value of the insured property is determined based on the original value.
The original value is different from the net value. Generally speaking, the original value is the purchase value of the insured property, while the net value reflects the depreciation of the insured property. Normally, the actual value of the insured property, such as machinery and equipment, is depreciated in proportion according to years of use.
Where the insured value of the equipment is determined based on the original value when applying for the insurance, and the sum insured is subsequently determined accordingly, the depreciation should not be calculated or deducted when assessing the loss and determining the insurance indemnity. In this situation, the principle of indemnity would be broken through and the basis of replacement would be the new condition of the equipment, not the condition before accident.
Where the insured value of the equipment is determined based on the net value when applying for the insurance, and the sum insured is subsequently determined accordingly, the depreciation should be calculated and deducted when assessing the loss and determining the insurance indemnity. In this situation, the basis of replacement would be the condition of the equipment before accident, not the new condition, which is consistent with the principle of indemnity.
III. Opinion and Suggestion
Pursuant to the above analysis, when the RV insurance is applied, the new condition would be the standard to calculate the insurance indemnity. But it should be noted that the RV insurance is an exception of the principle of indemnity and application of this insurance might make the insured obtain more indemnity than its actual loss and benefit from the insurance with the possibility of causing moral hazard. Therefore, the insurer should be cautious to apply the RV insurance if the insured property, such as the old equipment or buildings, has high rate of depreciation and its net value is largely different from its RV.
RV is one of the methods to determine the insured value; therefore, the application of the RV insurance is closely related to the determination of insured value. Hence, when assessing the loss and paying the insurance indemnity, the insurer should clarify the basis of determining the insured value and sum insured of the insured property at the time of application, e.g. net value or original value, in order to determine the basis of settlement.
In practice, regarding the fixed assets, such as machinery and equipment, the insured has an urgent demand to reinstate such insured property after the insured accident, in order to restore the production and minimize the loss as soon as possible. However, the insurance indemnity which is calculated on the basis of net value may be not enough to purchase the same or similar used equipment. As a result, the insured’s urgent demand cannot be satisfied. Moreover, there might be no same or similar used equipment in the market and more costs will be incurred to search such used equipment.
Based on the above reasons, the purpose of applying the RV insurance by the insurer to the fixed assets is to satisfy the insured’s demand to restore the production timely. Although in this situation the principle of indemnity would be broken through, it is still allowed and accepted by PRC laws and regulations. Further, in current insurance practice, applying the RV insurance to fixed assets to indemnify the insured has been permitted.
In conclusion, we consider that there exists positive significance to apply the RV insurance to the equipment and other fixed assets, but the insurers should be cautious when applying the RV insurance.