Fire and property · average clause
Enter today's replacement values, not book values, and this works out the sum insured a fire policy should carry. Then move the slider to see what the average clause does to a claim when the sum insured is short.
Add the reinstatement cost of the building, the replacement cost of plant and machinery, and the average value of stock. Reinstatement cost means what it would cost to build or buy the same thing today, at today's prices, with today's labour and freight. It is not the written-down value in your accounts, and it is not what you paid in 2011.
This is where most Indian factories go wrong. Book value falls every year through depreciation. Construction and machinery costs rise every year. A shed insured at its 2015 book value in 2026 may be carrying half the sum insured it needs, and the owner will not find out until a surveyor works out the value at risk after a fire.
The average clause, also called the condition of average, appears in every standard fire policy in India. It says that if the sum insured is less than the value at risk at the time of loss, the insured is treated as their own insurer for the difference, and the claim is reduced in the same proportion.
There is a cushion, and most owners do not know they have it. Both of IRDAI's standard products say the same thing at Clause F: the insurer will waive underinsurance up to 15%, and a proportionate share applies only where the sum insured is below 85% of the value of insurable assets. Since April 2021 no insurer may alter that wording, so for any business up to 50 crore of value at risk the cliff is at 85%. Above 50 crore the wording is negotiable again and nothing is guaranteed.
What the cushion does not do is forgive a real shortfall. The arithmetic below 85% is simple and unforgiving. Insure a plant worth ten crore for six crore and you are 60% insured. A fire that destroys one crore of stock does not pay one crore. It pays sixty lakh. The forty lakh gap is yours, and no amount of arguing changes it, because the clause is in the policy you signed.
The clause bites hardest on partial losses, which is what most fires actually are. Owners often assume a shortfall only matters in a total loss. The opposite is true: a total loss is capped at the sum insured anyway, so under-insurance shows up as a proportionate cut on every routine claim.
Stock is the item that moves. A textile unit in Bhilwara might hold two crore of yarn in a slow month and six crore before a season. Insure the low figure and every claim is averaged down. Insure the high figure all year and you are paying premium on stock you do not hold.
The answer is a declaration policy. You insure at the peak, declare your stock monthly, and the insurer adjusts the premium at the end of the year against the average of those declarations. You are fully covered on your worst day and you pay for what you actually held. Failing to file the declarations, however, lets the insurer fall back on the sum insured, so the discipline matters.
Put your current sum insured into the fourth field and the slider starts where you actually stand. If the bar shows you bearing a share of a routine loss, that gap is real and it is on your books now, not at renewal.
A revaluation costs a fraction of the shortfall it usually finds. We run these for clients at no charge before renewal, because a policy that averages down at claim time is worse than useless: it collected premium and did not do the job.
Neither. Fire policies in India are written on reinstatement value, which is the cost of rebuilding or replacing the property today with new property of the same kind. Book value is depreciated and almost always too low. Market value includes land, which a fire policy does not cover.
Yes, and this is the part owners are most often surprised by. The clause reduces every claim in proportion to the shortfall, so a partial loss is scaled down in exactly the same way as a total loss. Most fire claims are partial.
Use a declaration policy. You set the sum insured at your peak holding, file monthly stock declarations, and the premium is adjusted at year end against the average. You get peak-day protection while paying for your average holding.
No. Land is not destroyed by fire and is not insured. The building sum insured covers the structure, foundations to the extent specified in the policy, and permanent fittings, but never the land it stands on.
The surveyor appointed by the insurer assesses it after the loss, using current reinstatement costs. This is why the calculation should be done before you buy, not argued about after a fire. A pre-loss valuation on file is a strong position; a post-loss dispute is a weak one.
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