An insurer’s obligation to indemnify the insured does not arise until the insurer has elected whether to indemnify in money or by reinstatement. The election must be made within a reasonable time.

Mutual & Federal concluded an insurance contract with the liquidators of Expectio Properties and agreed to indemnify the insured for damage to the insured property caused by fire. The insured property was damaged in a fire. Two years later, the liquidators ceded their rights under the policy to Expectio Properties and lodged a claim for indemnity in the name of Expectio Properties.

The claim was for reinstatement costs, loss of rental income and prospective loss of income as a result of Mutual & Federal’s alleged failure to assess the claim and to reinstate the property.

Expectio Properties argued that, on a proper construction of the policy, the reinstatement of the insured property should be commenced with, and carried out with reasonable despatch by the insurer. Because this did not occur, Mutual & Federal was allegedly liable to compensate the liquidators for any loss of rental suffered by them.

Mutual & Federal disputed the claim for loss of rental income arguing that in terms of the reinstatement clause in the policy, it had the option to indemnify Expectio Properties in money or by reinstating the damaged property. That election had not yet been made.

The insured cannot claim anything other than payment unless the insurer has exercised an election in favour of reinstatement.

In agreeing with Mutual & Federal, the court in Expectio Properties (Pty) Ltd v Mutual & Federal Insurance Company Limited held that under the insuring clause the election whether to indemnify by money or reinstatement lies with the insurer. If the insurer elects reinstatement, it has the further option either to replace the damaged object with a similar object; or to restore the object to its condition before the risk occurred. If the insurer elects to restore the object, it follows that it also has the right to choose who will undertake the restoration or repairs. Insurers rarely elect to reinstate the property because of the difficulty in satisfying the insured that the property is restored to the condition it was before the damage.

The insured cannot claim anything other than payment unless the insurer has exercised an election in favour of reinstatement.

The reinstatement value condition clause entitles the insured to decide to reinstate the property. If so, it must notify insurers within six months of the event of its intention to reinstate. The insurer then has to indemnify the insured in cash for a reinstated property of the same kind or type but not superior to or more extensive than the insured property when new if:

  • the reinstatement is commenced with reasonable despatch; and
  • no payments will be made until expenditure has been incurred by the insured in reinstating the property.

The insured argued that it had complied with the notification provisions in the reinstatement value condition clause by notifying of its intention to reinstate the property but the court said this did not create an obligation on the insurer to reinstate the damaged property. Furthermore, there was no evidence that the insured had in fact commenced with the reinstatement or that it had incurred expenditure. So it had not proved that it had any rights to enforce the indemnity under the policy.