Extra Cost Of Reinstatement – Rationale and current form
In his paper to the 1975 Convention of The Council of Loss Adjusters of Australasia, Howell Swanton notes that the Extra Cost Memorandum applicable to the Australian standard fire policy in a nutshell is “designed to cover the additional cost of the requirements of local and other authorities to bring premises and equipment into line with current building code and occupational standards which they impose arising out of any application for construction, alteration, repair or reinstatement of damage within the boundaries of a property”.
Fast forward 40 years and the Industrial Special Risks MKIV wording follows a very similar pathway.
The Extra Cost of Reinstatement Memorandum states that:
This Policy extends to include the extra cost of reinstatement (including demolition or dismantling) of damaged property “i.e. buildings. machinery, plant and all other property and contents; other than those specified in items (b) to (i) under Basis of Settlement” necessarily incurred to comply with the requirements of any Act of Parliament or Regulation made thereunder or any By-Law or Regulation of any Municipal or other Statutory Authority; subject to the following Provisions and subject also to the terms, Conditions and Limit(s) or Sub-Limits of Liability of this Policy
Several Provisions apply to the Memorandum summarised below:
(i) Work may be carried out upon other sites “if the requirements of the aforesaid Act, Regulation or By-Law so necessitate” and must commence with reasonable dispatch
(ii) Excludes costs the subject of prior compliance notice
(iii) Coinsurance shall not be taken in to account
(iv) All other policies shall be on a similar basis
(v) If property the subject of the claim, has suffered only partial damage (i.e. less than 50%) the claim for Extra Costs shall be limited to that section of damaged property OR the sub-limit specified whichever the greater.
Whilst all of the Provisions are relevant two points stand out.
Provision (ii) excludes coverage “…with which the Insured had been required to comply prior to the happening of the damage“
Provision (v) applies the term “whichever the greater”; not to be confused with the more common form whichever is the lesser. Choosing the correct sub-limit is therefore, as always, an important consideration.
Three Endorsements are generally available, subject to underwriter acceptance, that modify this standard Memorandum
Extra Cost of Reinstatement Elsewhere – (ECRELPC4)
Provision (i) of the Extra Cost of Reinstatement Memorandum is amended by deleting the words “if the requirements of the aforesaid Act, Regulation or By-Law so necessitate”.
Extra Cost of Reinstatement – Provision (v) Deleted – (UNLIMXB4)
Provision (v) of the Extra Cost of Reinstatement memorandum is deleted.
Additional Extra Cost of Reinstatement (B) – (ADDECPC4)
(Applicable to buildings, machinery, plant and all other property and contents other than those specified in items (b) to (i) under Basis of Settlement).
The policy extends to cover the additional extra cost of reinstatement including demolition or dismantling of the insured property damaged, necessarily incurred by the Insured to comply with the requirements of any Act of Parliament or regulation made thereunder or any by-law or regulation of any municipal or other statutory authority and not otherwise recoverable under the terms and conditions of the policy.
Provided that the indemnity afforded by this clause:
(a) shall be limited in respect of each loss or series of losses arising out of any one event to the amount shown in the Policy Schedule against Additional Extra Cost of Reinstatement (B), which amount shall be separate from and additional to the Limit of Liability expressed in the Schedule of the policy in respect of buildings, machinery, plant and all other property and contents other than those specified in items (b) to (i) under Basis of Settlement;
(b) shall not include the additional cost incurred in complying with any such Act, regulation, by-law or requirement with which the Insured has been duly required to comply prior to the happening of the damage; and
(c) shall not be subject to the Co-insurance Memorandum contained in Section 1 of the policy.
The work of reinstatement (which may be carried out wholly or partially upon another site or sites if the aforesaid Act, by-law or regulation so necessitates subject to the liability of the Insurer(s) not being thereby increased) must be commenced and carried out with reasonable despatch, failing which the Insurer(s) shall not be liable to make any payment beyond the amount that would have been payable under the policy if this Memorandum had not been incorporated therein.
This last endorsement is worthy of further mention because whilst the standard Memorandum provides extensive cover for extra costs to be recoverable, this endorsement was developed because authorities are increasingly likely to insist that existing premises be substantially upgraded and not only the damaged portion but other buildings or insured property at the situation that is not affected by the incident. For example to remove all asbestos from the situation across all buildings (not just the damaged portion) or to provide extra off-street parking space to comply with zoning regulations. The Additional Extra Cost Of Reinstatement Memorandum gives the Insured greater protection for undamaged and/or separate property at the situation.
More details on the ISR MKIV endorsements can be found in LMIPolicyCoach including helpful ‘coaches comments’.