What is Reinstatement Clause

A reinstatement clause is an insurance policy clause that states when coverage terms are reset after the insured files a claim. Reinstatement clauses typically do not reset a policy’s coverage limit, but they do allow the policy to restart coverage for future claims.

BREAKING DOWN Reinstatement Clause

A reinstatement clause states when coverage terms are reset after the insured files a claim. Individuals and businesses purchase insurance policies to cover themselves from damages or losses caused by specific perils, such as fires and floods. Coverage is triggered when the peril being insured against occurs, at which point the insured can file a claim to receive money to cover damages. The amount that the insured can recoup from the insurer is set at a maximum amount, called the coverage limit. This limit may be set on a per occurrence, per risk basis, or aggregate loss basis.

Insurance companies that are still processing a claim may want to limit any further coverage for an insured peril until the claim is paid out. In order to be covered from future perils while an existing claim is still active, the insured would have to make sure that the policy is reset and the coverage renewed. This is done through a reinstatement clause.

Reinstatement clauses indicate the point at which coverage restarts. The restart may be triggered by a claim being filed or by a claim being paid out by the insurer. Additionally, the clause will indicate whether the coverage limit is reset (in per occurrence contracts) or whether the same limit applies (in aggregate loss contracts).

The ability to reinstate a policy is not guaranteed by law, so the availability of a reinstatement clause may differ between insurance providers and policies. The process and requirements for a reinstatement may also differ from policy to policy. It largely depends on how much time has elapsed since an insurance policy lapsed, the company, and the product type being reinstated. It might be less expensive to get a new insurance policy than to reinstate an old policy. 

Reinstatement Clause in Action

For example, a business purchases a property insurance policy, and the business operates in an area that occasionally has floods, but the frequency of the floods is typically low. Over the course of the summer, the area receives more rain than expected, and the business is damaged by floodwaters. After the business filed a claim for this damage – but before the claim was settled – another storm passed through the area and caused additional damage. Because the policy had a reinstatement clause that reset coverage after the first claim was filed, the policyholder was able to make a subsequent claim following this second, separate flood.