Deciding on The Sum Insured under Fire Insurance Policy

Insurance providers and aggregators have recognized the potential of the fast-growing Small and Medium Enterprises (SMEs) sector. As a risk mitigation tool, a fire insurance policy is highly effective in keeping businesses afloat during difficult and unprecedented times. However, more than just picking up an insurance policy, it is imperative to decide on the correct sum insured under a fire insurance policy.

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Sum Insured under Fire Insurance

The main aim of insurance is to put the insured either in the same financial position as he was at the time of loss or in a relatively better position than he would have been after the occurrence of the loss. The purpose of taking insurance is to get covered and getting an adequate sum insured would help in getting the benefit of the insurance coverage.

Determining the Sum Insured under Fire Insurance Policy for Each Property Type

Building: The valuation is calculated based on the built-up area and other constructional specifications. The current cost of construction for similar buildings can also be taken into account to check the valuation. Thus, a Depreciated Value Policy or Reinstatement Value Policy is usually applied to buildings.

Plant and Machinery, Furniture, Fixtures and Fittings: The main factor to be taken into account for determining the value of plant and machinery includes the age of the machinery, availability of similar machinery in the market and its pricing, cost of the original machinery, inflation rate, etc. Plant and machinery can also be insured on a Depreciated Value or Reinstatement Value.

Stocks: The valuation of stocks for the sum insured is mostly based on the market value. The valuation differs depending on the stage at which the stocks are. The calculation process is different for the sum insured for raw materials, the stocks in work-in-progress, finished goods, and waste materials.

Other Valuables and Antiques: Valuation of these items cannot be done on the market value. Hence, the insured and insurer agree upon a specific value at the policy issuance time. This type of policy is called an Agreed Value Based Policy.