Reinstatement: like for like, or to today's standards?

A construction policy promises to reinstate the works, and the word seems so clear that it goes unread. It nonetheless covers a hard question: reinstate what, exactly? The works as they stood the day before the loss, with their characteristics then, or the works as they would have to be today to exist lawfully? On an existing asset the question barely arises, because the prior condition is known and like-for-like replacement is possible. On a construction site it arises constantly, because the works were not finished, because their value was growing, and because the rules they must comply with may have changed since the project was designed.

The first gap concerns depreciation, and it is smaller here than elsewhere, which is why it is forgotten. Works under construction are new by definition: concrete poured eight months ago has no wear, erected equipment has never run. The rule is therefore indemnity at replacement value, without deduction, and that is a fundamental difference from insuring an existing building. It stops being true, however, for two categories the site harbors anyway: second-hand or reused equipment, whose age is real, and retained existing property on a refurbishment, which comes under the previous module and follows the regime for old fabric.

The second gap is upgrading to current standards, and it is the costliest. Damaged works are rebuilt under the regulatory regime of the day of rebuilding, not that of the day of design. On a project whose studies are four years old, thermal regulations, fire regulations, seismic rules or accessibility standards may have moved on, and the authority granting permission to rebuild will not accept a like-for-like reconstruction of something that would no longer comply. The project owner must therefore spend more than the cost of the prior condition, and that extra spend is not the repair of damage: it is an improvement imposed by law.

Policies handle that extra cost in three ways, and one must know which one applies. Some exclude it outright, indemnifying on a like-for-like reconstruction basis even where that reconstruction is impossible, which leaves a structural shortfall. Others admit it under a dedicated extension, capped as a percentage of the damage or as an amount, and that is the most widespread form. Others still admit it with no cap of its own but reserve the case where the upgrade was already mandatory before the loss: works that were already non-compliant are not brought up to standard at the insurer's expense, and that reservation is legitimate, since it targets a spend the loss did not cause but merely revealed.

The third gap is that repair costs more than the original construction, for purely physical reasons that initial estimates ignore. Demolition must come before rebuilding, which is work the original contract did not include. Work must happen inside partly completed works, where access, cranes and site facilities may have been dismantled. Night work or work alongside other trades is often needed to claw back the schedule. A two million repair therefore does not compare with two million of new work, and the ratio commonly sits between one and a half and two times the equivalent new cost.

A question of method runs through all of this: repair or replace? The two options almost always coexist, and they do not have the same consequences over time. Repair costs less immediately and leaves repaired works, whose service life and future behavior are uncertain, and where a later defect may be attributed to the repair rather than to the loss. Replacement costs more and delivers new works, but it invites the charge of enrichment if the replaced item was better than the old one. The indemnity principle arbitrates in theory; in practice, the arbitration turns on residual service life and on the warranty the contractor is willing to give on its repair.

That leaves the head most often neglected, and it always comes on top: ancillary costs. Debris removal and disposal, whose cost explodes where materials are mixed or contaminated. Design, technical inspection and coordination fees for the repair, computed as a percentage of works nobody planned. Costs of reconstituting documents, shop drawings and calculation notes destroyed or made false. Expediting costs, if time must be clawed back. Each of those heads carries its own sub-limit, and their sum frequently exceeds twenty percent of the direct damage, on lines nobody looks at when placing the policy because they seem incidental.