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 sum insured under a fire insurance policy determines the premium for the insurance policy. Thus, signifying the actual value of the assets that are to be insured. Opting for a higher sum insured than the actual value will give no advantage to the insured since the claims are subject to the Indemnity Clause.

Sum Insured Under Fire Insurance Policy

If the sum insured is lower than the actual value of the assets or property, then the Average Clause comes into force and restricts the share of the property insured. The sum insured under a fire insurance policy should thus be an adequate one.

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.

Choosing The Amount To Be Insured

To get an amount equal to or closest to the loss or damages incurred after the fire breakout, you can choose one of the following methods of indemnity or fire insurance clause:

  1. Normal Indemnity or Market Value Policy or Depreciation Value Policy: The market value of the property is taken as the sum insured. The depreciation amount is deducted from the actual expenses till the time of the accident under this policy.
  2. Reinstatement Value Policy: This type of policy is also popularly known as "new for old". Under this policy, irrespective of the age or the usage of the destroyed property, the insurer provides an amount that is needed for constructing a new property. The sum insured under this fire insurance policy is, thus, the reinstated cost to buy or reconstruct a new property.
  3. Escalation Clause: This fire insurance clause helps in fighting inflation. It provides for an automatic and steady increase of the sum insured by payment of an additional premium by the insured.

Classification Of The Property

We can broadly divide the property into the following:

  • Buildings
  • Plant and Machinery, Furniture, Fixtures and Fittings
  • Stock
  • Other Valuables and Antiques

Determining The Sum Insured Under Fire Insurance Policy For Each Property Type

  1. 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.
  2. 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.
  3. 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.
  4. 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.

Conclusion

Making an informed decision when buying a fire insurance policy is thus very important. As a buyer of an insurance policy, you should thus carefully establish the sum insured for the said property. You can seek the assistance of qualified professionals from Policybazaar to get an adequate sum insured under a fire insurance policy.

Written By: PolicyBazaar - Updated: 18 August 2022