What happens to the Claim if you buy two separate policies for the same property?

Property owners might be too afraid to lose their valued offices to the natural and man-made risks which have become quite common nowadays. Recent examples include the estimated financial losses ranging from $3 billion to $15 billion in Chennai during the floods in 2015.

Building a property again can cost one a fortune, and this is what can make one overprotective of their workplaces. Moreover, with rising inflation, people are trying to secure each and every possession by taking enough safety precautions. But, it is not enough. To be safe from irrecoverable losses, office owners prefer to invest significantly in customized office insurance policies.

Sometimes, one policy is not deemed enough and owners often choose to avail two separate property insurance policies of the same or different limit of indemnity for the same property. This might seem to be a good choice as two office insurance plans will lead to greater amount of cover for the same property. However, if you think that in the case of loss or damage in future, you will be doubly insured and receive the total sum insured of both the policies, you will have to shed such thoughts.

Let’s have a look at some examples to become aware of how the claims process will work in case of damage to the office building which has been insured under two insurance plans:

Pro-rata Settlement

Case 1: Mr. Sharma is an entrepreneur who avails two separate office insurance plans of Rs. 5,00,000 each.

Due to heavy rainfall and floods in the region, the office ceiling and outer compound are completely damaged leading to an estimated loss of Rs. 5,00,000. The cost of reinstatement for the entire property has been estimated to be Rs. 10,00,000, which is double of the sum assured provided by each policy.

How will the claim be paid?

If you think that both of Mr. Sharma’s policies will now be totally utilised and compensate for the entire loss, you need to look again at the property insurance policy guidelines.

First, the insurer has to prorate the claim as per the total value of the property vis a vis the sum insured; i.e. as the loss value is 50% of total value, the insurer will reimburse only 50% of the total claim, i.e. Rs. 250,000.

Second, when insured owns two separate office insurance policies then, the loss will be divided as per the proportion (called pro rata liability clause) to the total limit of indemnity provided by both the policies.

Total Claim Paid: In this case, both policies have the same amount of sum insured, so the payable claim of Rs. 250,000 will be divided equally between the two insurers.

Therefore, total indemnification Mr. Sharma will receive is going to be only Rs. 2,50,000.

Same as he would have received if he bought only one policy of Rs. 500,000.

Case 2: What happens in case the sum insured of both the policies is not equal? How will the claim amount be divided in such cases?

Suppose Mr. Sharma avails one policy worth Rs. 5,00,000 and the other policy is worth Rs. 10,00,000. If the building catches fire and suffers an estimated loss worth Rs. 12,00,000 (while the total reinstatement value of the building is Rs. 20,00,000) how will the plans work to repay the claim amount?

First, the claim will be prorated as the total insured value had been more than the insurance cover the claim payable will be reduced proportionately. Therefore, only 75% of the loss (= Rs. 9,00,000) is payable by the insurers.

Now that the total payable claim has been estimated the two insurers will divide the amount in the proportion of their respective sum insured.

The first policy will bear one-third of the amount as the cover provided by it (Rs. 5,00,000) is just one-third of the total of the sum insured by both the policies (Rs.15,00,000).

So, the first policy will pay Rs. 3,00,000 (one-third) of the total payable claim. And,

The second policy will pay the remaining two-thirds of the amount of loss (Rs. 6,00,000) as its proportion of cover to total sum insured amounts to the same percentage.

No Additional Benefit

Insurance is an instrument of reinstatement the financial condition for the insured and not for profiteering. Thus, multiple insurances do not lead to greater compensation.

Availing separate policies can be opted if you aim to increase the limit of indemnification which might not be possible with just a single insurance policy. However, if you do so, you will end up paying premiums for two similar kinds of policies despite the claim being proportionately divided between the two.

Clarify Your Doubts

SecurNow is one of the leading corporate insurance advisors in India. They not only operate an award winning online platform, where you can compare and buy insurance policies, but also offer qualified advice based on your needs.

Therefore, stop believing the seller’s information and start receiving relevant and qualified insurance advice from the best.

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