Reinstatement or insurance payment in corporate fire insurance

This article characterizes the optimal corporate fire insurance contract wh en the insured firm has private information about the economic value of the damaged assets. It is shown that the indemnity should be lower when the fi rm receives insurance money than in case of reinstatement, but there should be partial coverage even when reinstatement is chosen. When a risk of arso n exists, the insurer may only reimburse reinstatement costs. Finally, the optimal contractual arrangement specifies that, in order to di scriminate among firms, the insurer may use a (randomly exercised) reinstat ement option as a screening device.