Limit v Sub-Limit of Liability on Additional Extra Cost of Reinstatement Endorsement.

Questions And AnswersI received the following question in respect to the Additional Extra Cost of Reinstatement. It took a bit of research to find the answer and so I thought I would share the findings with you.

The question was:

Allan,

I wanted to pick your brain on endorsement ADDECPC4 which reads:

Additional Extra Cost of Reinstatement B

(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.

Our liability shall not exceed the amount of the sub-limit stated in the Schedule of the policy against “Additional Extra Cost of Reinstatement (B)” for any one loss or series of losses arising out of any one event or occurrence.

I have received a couple of queries noting that the endorsement appears to extend cover beyond the Limit of Liability on the policy. My understanding of the intent of this endorsement is that it extends cover beyond the existing sub limits, particularly “Extra Costs of Reinstatement” but, in all cases the Limit of Liability for the policy would remain as our maximum exposure.

How do you view the endorsement ?

Name and email address provided.

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I replied as follows:

Originally the ISR was designed to have a Limit of Liability which was all encompassing with any Sub-Limit to be paid out of the Limit of Liability.

This Limit of Liability was to be higher than the Declared Value for 2 main reasons.

One to allow for inflation in reinstatement costs between the start date of the policy and the date the works were completed; and

The second to cover any additional benefits which were not subject to co-insurance such as removal of debris, extra cost of reinstatement.

This worked  well until some insurers capped the percentage uplift for the Limit of Liability to 10% of the Declared Value. This left a potential uninsured portion even though the client had been charged for coverage such as Additional Extra Cost of Reinstatement. As such, it was felt necessary to provide the coverage for Additional Extra Cost of Reinstatement in addition to the Limit of Liability.

The wording you referred to was the “B” version of the endorsement. The “A version of the endorsement, XTMURXB4 was drafted and has been in use since circa 1990 and has been widely accepted in the market. That endorsement had the same wording but had an embedded Sub-Limit of liability of $250,000.

When I was commissioned to revisit the endorsements about 15 years later, I made the conscious decision to remove all the embedded sub-limits from within endorsements and have the sub-limit appear in the Policy Schedule so that the Underwriter, Broker and Insured all knew up front what the level of coverage was.

I did not change the wording of the endorsement other than that and so the words of endorsement ADDECPC4 continue to provide this coverage in addition to the Limit of Liability for exactly the same reason as the problem had not gone away.

In fairness, some insurers do allow the sub-limits to be added to the Declared Value before the percentage uplift but there are still many who do not negating one of the great benefits of an ISR policy.

In the 24 years that the endorsement has been around I only know of 1 case where the sub-limit has been paid in addition to the Limit of Liability and in fairness, if the insurer received a premium for the coverage then the client should I feel be compensated.

I hope this explains the situation.

Regards

Allan

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