On the two IRDAI-mandated fire wordings that cover Indian commercial risks below Rs 50 crore, the average clause does not apply from the first rupee of shortfall. Underinsurance up to 15% is waived, and a proportionate share falls on the insured only where the sum insured is below 85% of the value at risk.
A fire at a Bhilwara spinning unit does not usually end in an argument about whether the policy covers fire. It covers fire. The argument, when it comes, is about the number on the schedule. The mill was insured for what the building and plant cost years ago, the claim is settled on what they cost to rebuild today, and the gap between those two figures is taken out of the settlement rather than out of the insurer. Owners discover this in the week after a loss, which is the worst possible week to discover it.
That reduction has a name. Where the sum insured sits below the value of what is insured, the insurer pays the same share of the loss that the cover bears to the true value, and the policyholder carries the rest. Insure half of what you own and a partial loss is settled at half. The clause is not a penalty clause and it is not discretionary. It follows from the idea that premium is charged on a declared value, so a claim is paid against that same declared value.
Most explanations stop there, and stopping there is what makes them wrong for the businesses we place. On the two standard fire wordings that cover almost every Indian commercial risk below Rs 50 crore, averaging does not start the moment the sum insured falls a rupee short. It starts at 85% of the value at risk. Above that line the shortfall is waived and a claim is paid in full. The difference between the version people repeat and the version in the policy is the difference between bearing a share of every loss and bearing none of it.
The wordings are Bharat Sookshma Udyam Suraksha, which applies up to Rs 5 crore at one location, and Bharat Laghu Udyam Suraksha, which runs from Rs 5 crore to Rs 50 crore. Both say the same two things. Underinsurance up to 15% is waived. A proportionate share falls on the insured only where the sum insured is below 85% of the value of insurable assets. Since April 2021 no insurer may alter those clauses, so this is not a concession one company offers and another withholds. It is the contract, identical across the market, and it is worth knowing because it changes what a sensible margin of error looks like.
Work it through. Take a unit whose plant, building and stock would cost a certain sum to reinstate today, and suppose the schedule carries only half that figure. A partial loss is settled at 50% of the assessed amount. The other half stays with the business, alongside the disruption, the replacement orders and whatever the bank has to say about it. Nothing in the policy is defective. The cover did exactly what the schedule asked it to do.
Now move the same schedule up. Carry a sum insured at 85% of the reinstatement value and the arithmetic stops applying: the waiver absorbs the shortfall and the same partial loss is settled in full. That is the practical target. Not perfection, which no valuation achieves and which nobody should pay for, but a figure comfortably inside the band the wording already forgives. A business that reviews its sums insured once a year and keeps them above that line has removed the commonest cause of an underpaid property claim in India.
Above Rs 50 crore at one location the standard wordings stop, and so does the waiver. Larger risks are written on bespoke or tailor made wordings where the terms are negotiated insurer by insurer. Some carry a margin, many do not, and the average clause can bite from the first rupee of shortfall. We have seen brokers carry the 85% habit across that threshold and reassure a client who had no such protection. Read the wording that was actually issued. On a risk of that size the valuation deserves a professional, not a spreadsheet.
Why do sums insured drift low in the first place? Rarely because anyone decided to under insure. The figure is usually the one in the fixed asset register, and that register carries historical cost less depreciation, which is an accounting number with no relationship to what a builder charges this year. Construction and machinery costs have moved a long way since most of these schedules were first written. A sum insured that was accurate when it was set drifts quietly below the line every year that nobody revisits it.
Stock is the other half of the problem, and it moves faster. A trader who holds a steady average through the year can still be sitting on several times that value in the weeks before a festival or a shipping deadline. Insure the average and a fire in the wrong week is settled against a value the godown has not held for months. The answer is a declaration policy, where the sum insured is set at the peak and premium is adjusted against periodic declarations of actual stock held. You pay for the exposure you carry rather than for the exposure you averaged.
One more thing decides whether the number is right: the basis of settlement. A policy written on reinstatement value pays the cost of rebuilding or replacing with new, which is the basis a working business needs. A policy written on indemnity pays the depreciated value, and for an older building that can be a fraction of what reconstruction costs. Both bases exist. The sum insured has to match whichever one the schedule names, and a reinstatement policy carrying an indemnity valuation is underinsured on the day it is issued, before anything has drifted at all.
So the renewal question is not the one most owners are asked. It is not what the premium is this year. It is what the building, plant and peak stock would cost to put back today, whether the schedule reflects that figure, and whether the basis of settlement matches the valuation behind it. That takes an hour with the asset register and the wording, and it is worth more than any premium saving on the same policy.
We review sums insured at every renewal for the clients we place, and we do it against reinstatement cost rather than the book. Where a schedule is short we say so in writing and show the arithmetic, including where the 85% line falls for that risk and what a partial loss would settle at as things stand. If you want the same check on a policy we did not place, send us the schedule and we will read it and tell you what it would pay.
On the two IRDAI standard fire wordings below Rs 50 crore, no. Clause F(3) waives underinsurance up to 15%, so averaging applies only once the sum insured falls below 85% of the value at risk, the cliff set by Clause F(4). Above that line a claim is settled in full.
They are the standard fire and allied perils products every Indian insurer must issue below Rs 50 crore at one location. Sookshma covers up to Rs 5 crore and Laghu from Rs 5 crore to Rs 50 crore. The wordings are mandated and identical, so insurers compete on price and service rather than on cover.
No. The standard wordings stop at Rs 50 crore. Above that the policy is a negotiated wording, no waiver can be assumed, and the average clause may apply to any shortfall at all. Read the wording that was issued rather than carrying the 85% rule across that threshold.
Through a declaration policy. The sum insured is set at the peak value and premium is adjusted against periodic declarations of stock actually held, so you are covered in the weeks the godown is full rather than against an annual average.
Whatever the basis of settlement names. A reinstatement policy pays to rebuild or replace with new, so the sum insured has to reflect current reinstatement cost. Historical cost less depreciation from the fixed asset register is an accounting figure and using it is the commonest cause of underinsurance we see.
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Rakshit Financial Services is an IRDAI-registered insurance broker with offices in Udaipur, Jaipur and Mumbai. This article is general information only and is not insurance advice or a solicitation to purchase. Insurance is the subject matter of solicitation. Please read the policy wording, benefits, exclusions and terms carefully before concluding a sale. Cover and eligibility are subject to insurer underwriting.
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