What is the reinstatement clause?

Reinstatement or Aggregate Limit of Indemnity – is there a difference?

In a professional indemnity policy and indeed now some Management Liability covers you will see either a Reinstatement Clause or an aggregate limit of the limit of liability.

Is there a difference? Yes there is and it is a trap that could catch you out!

If a policy contains a reinstatement clause then in the event of the Insured having more than one Claim in a period of insurance, the policy provides an automatic reinstatement of the limit of indemnity. This makes sure that if there is an exhaustion or partial exhaustion of the limit of indemnity, because of the notification of a claim during the period of insurance, the Insurer will reinstate the limit of indemnity for the period of insurance back to the full amount. Insurers will generally provide just one reinstatements but some policies may have two or three reinstatements. Some Accountant’s policies have unlimited reinstatements.

But how does this differ from an aggregate limit?

An aggregate limit can be double the amount of the limit of liability and can appear therefore to be one reinstatement, but in actual fact, you can have a multitude of reinstatements until the aggregate limit is exhausted. The limit of liability given is the maximum you can claim for any one matter.

So as an example, if an Accountant has a $5,000,000 limit of liability with a $10,000,000 aggregate and he misinterprets a section of the Tax Act on 30 separate occasions over a period to his clients and as a result they all incur fines and additional costs as a result of the Accountants negligence, they would all be covered until the aggregate limit is exhausted of all the claims were under the limit of liability. The claims would all be for variable amounts but if they all averaged $250,000 with an aggregate limit, they would all be covered by insurance.

If on the other hand they had one reinstatement, one claim of $250,000 would see the sum insured return to the limit of liability of $5,000,000 but after that, the policy will only cover another 19 claims for $250,000 each. 10 claimants would miss out or need to be paid out directly by the Accountant because his sum insured was now exhausted.

If the Accountant had two reinstatements, only one more claimant would be covered and so on. Depending on your occupation, making the same mistake with many clients on separate occasions is possible. Some professions it would not be so easy but how the sum insured or limit of liability is set up could foreseeably count. Financial Planners, Insurance Brokers, OHS and Human Resource Consultants are other examples.

It is also just plain wrong to assume that with one reinstatement on a limit of liability, the aggregate of liability is automatically doubled, Technically yes if there are two claims for the maximum sum insured, but more often than not they will be smaller amounts and once one reinstatement has applied, it is certainly not the Aggregate is adjusted by the amount of the first claim, and you have in this example $9,750,000 left. It is potentially misleading to state both.

The other issue is some insurers show “Reinstatements” as an extension. Others show it in the Insuring Clause or the Conditions of the policy. I have even found the Reinstatement Clause in the Exclusions from one insurer. Make sure you know where it is and how it operates within the policy.

So make sure it is either clearly an aggregate amount or the required number of reinstatements are listed.

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It stands to reason that if you don't pay for something as promised, the promise is broken. If premiums are not paid, the insurer can cancel the policy because of a broken promise. If all monies due are not paid within the grace period, the contract will lapse. The reinstatement clause stipulates the conditions under which the policy can be restored. If the insured wishes to reinstate the contract, all overdue premiums plus interest must be paid.

The lapsed policy can only be reinstated within the policy's specified period of time from the date of cancellation; usually policies may be reinstated within three years after lapse. If the policyowner goes beyond that time, a new contract must be purchased. It is often wiser to reinstate a contract rather than purchase a new one. Most likely, the premiums would be higher on a new contract due to the mere fact that the insured will have gotten older. The insured would most likely be required to provide evidence of insurability; however, some insurers will waive this requirement for lapses of less than two months. When a policy is reinstated, the incontestable clause is usually regenerated. If the policyowner had taken out any loans on the policy, repayment of the full loan amount may be required; however, if the policy had been previously surrendered for its cash value, it would not be subject to the terms of the reinstatement clause.

Reinstatements become effective immediately for accidents. In most cases, it does not become effective for illness coverage until after 10 days from the date of reinstatement. This is to avoid adverse selection (preexisting conditions).

Most insurers will require the following when reinstating a lapsed policy.

• All past due premiums, plus interest if applicable, must be paid.
• Any outstanding loans on the lapsed policy may be required to be paid back.
• Evidence of insurability may be required.

When a policy is reinstated, a new suicide exclusion does NOT go into effect again due to the lapse. (See Lesson 3.9.11)

Helpful Hint

A reinstatement provision is a clause in some life insurance policies that allows the insured to reinstate a lapsed policy provided they meet certain parameters and execute the provision within the specified time frame. Reinstatement provisions most often come into play after a policy has lapsed because of nonpayment.

Reinstatement during the grace period

In order to keep your life insurance policy active, you need to continually make the agreed-upon premium payments.

The day you miss a payment, a clock starts ticking. Life insurers generally offer a grace period of around 30 days. During that grace period, you can reinstate your policy very easily. Usually, you’ll just need to make up the missed premium. You might be subject to interest on that missed payment or a reinstatement premium, too.

Still, though, reinstating a policy during the grace period is significantly easier than doing so afterward.

Reinstatement after the grace period

If the grace period expires without you making up the missed payment, the life insurance policy lapses. If you don’t have a reinstatement provision, that’s that. If you want life insurance coverage moving forward, you’ll need to apply for a new policy.

If you have a reinstatement provision, though, you have options. Yes, you can choose to let the policy lapse at that point, but you can also call on the revision to get coverage back in place. Most reinstatement provisions give you a specific window — like 3-5 years — to reinstate your policy after a lapse.

To reinstate your coverage, you’ll usually need to do two things:

• Submit new evidence of insurability (EOI). To qualify for reinstatement, you need to show the insurer that you’re still in a reasonably good state of health. To submit this new EOI, you might need to get another life insurance medical exam and/or complete a medical questionnaire.
• Make up your missed payment(s). You need to pay the insurance company everything that you would have paid had the policy not lapsed. If it’s been a year or more since your policy lapse, that means making up all of the premiums you would have paid during that timespan. You might be subject to fees or interest, too.

A reinstatement provision gives you the option to apply for reinstatement. It does not, however, guarantee that your insurer will grant reinstatement. If your EOI submittal turns up any red flags, they could deny reinstatement or increase your premiums accordingly.

That might make it tempting to not disclose any health conditions that have popped up since you initially purchased your coverage — but don’t. If your insurance company learns that you intentionally misled them during the reinstatement process, they can void your policy. And since that truth might not come out until after you pass away and they review your records, it could leave your beneficiaries empty-handed.

The benefits of using a reinstatement provision

If your premiums could go up during reinstatement, you might wonder why you’d bother with it at all.

The main benefit of policy reinstatement hinges on your age. When you reinstate a policy, you still get the premiums based on the age when you initially purchased the policy. If you buy new life insurance, that policy will get priced according to your age now — and life insurance costs increase steadily as you get older.

That means that even if a new health condition means you’ll pay higher premiums after reinstatement, your policy will probably cost less than an entirely new one. If you want to be sure, you can pursue reinstatement with your current insurer while gathering quotes from other insurance providers, then compare the costs.