A question that I have answered hundreds of times – the pros and cons of insuring for indemnity

In the last two days I have had very similar questions and thinking about it, it would be one of the most common questions put to me and I am surprised I have not posted an article on it before now.

Good Morning Allan,

Please can you advise if you have an article advising the Pro’s and Cons of insuring Commercial Buildings on an Indemnity vs Reinstatement basis

I have a sawmill client under attack and would appreciate any brief comments (we presently have them on Reinstatement.. the attacking quote is on Indemnity.

I would appreciate hearing from you as soon as possible accordingly

Thank you and Regards

Chris [surname and email provided]


My response to this one is as follows:

Hi Chris,

The only pro in insuring for indemnity is a saving in premium but the issue is at what cost to PROTECTION.

The vast majority of claims are partial losses and in Australia it is more often weather related than any other peril. Having said that, fire is a very real risk for a sawmill.

Let us assume the roof of the sawmill is damaged in a hail or wind storm and requires replacement. I will leave out water damage to machinery for the moment.

If the policy is underwritten on an indemnity basis then the Insured will not get a new roof but will have to contribute to the cost based on the age and condition of the roof. They are in fact their own insurer on every claim for difference between the indemnity value, that is, current replacement cost less an allowance for its age and condition and its replacement value.

As a claims guy, I have learned a couple of things. One, Murphy’s Law dictates that the loss is going to happen at the worst time for the Insured. This means when they are low on cash or are extremely busy and turning back to their machinery and contents they do not have time to mess around looking for second hand equipment and if they do they find there is nothing decent available and after a frustrating delay find they have to put their hand in their pocket to pay for new equipment.

By insuring for full replacement value with extra cost of reinstatement, they can sleep well at night knowing they will not have some hidden cost that could come along any time during the year and bite them should a loss occur to their building or contents but they have the best cover which will replace the items new for old.

The Insurance Industry invented Reinstatement and Replacement not as a gimmick but as a way to provide better protection for their clients, to allow them to recover from an insured event quicker and give them the best chance of surviving the inevitable disruption. Remember it costs insurers more each claim to provide this great coverage.

Insurance has never been cheaper. Fire Service Levy is not imposed in Queensland. Every Insured needs to understand that the cost of the insurance is not the total cost of risk. It is the cost of transferring the risk away from the owners of the business to an insurer in the event something has happened.

When a claim occurs, the Insured will not be thinking about the small amount of premium they saved, they will want the best insurance coverage, the best claims service with an insurer that has the funds to pay the claim.

Business owners the world over are optimistic. The most common thing said to me on arriving at a claim is: I never thought it would happen to me. Bad things happen to good people every day. Looking at the aftermath of Cyclone Debbie, we have heaps of clients who are saying “if only”.

I hope your client takes the prudent course of action and insures for full replacement. I know that I do.




One final point, if you are the attacking broker, please consider the risk you are asking your clients to take on by taking this approach. Are you really acting as a trusted adviser if all you are doing is giving them a second rate product!

I appreciate that not everyone is as risk adverse as I am but we owe it to our clients as professionals to spell out the risk honestly to them.

Let’s make insurance great again.

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