The most important aspect of a fire insurance policy is the sum insured. The sum insured, should ideally represent the market value of the property/asset. If more than one property is insured in the policy, values for each block should be provided and divided into:

  • Stocks,
  • Buildings
  • Plant and Machinery, furniture, or other capital assets for personal use
  • Valuables, antiques, and precious materials

Each of these properties will be insured based on the type of insurance available for it:

  • Stocks in Trade: Cost of Landing for the buyer, plus any processing cost, also called market value based
  • Buildings, capital goods (plant and machinery) and personal assets like furniture, etc.:
    • Depreciated Value Based: Material and labour cost (landed cost for insured in case of machinery) after inflation and depreciation for age, or
    • Reinstatement Value Based: Material and labour cost after inflation but without depreciation
    • Under construction building: Material and labour cost only
  • Valuables, Antiques and Precious Materials: Such assets cannot always be valued at market value. Therefore, a value is agreed upon between the insurer and the insured for the insurance. This is called Agreed Value Basis insurance.

Therefore, below-mentioned guidelines are provided for the calculation of the value of property:

Building: If the construction of the building is completed, the value is determined on the depreciated value basis or the reinstatement value basis. If the building is under construction, the total value of material and labour is estimated.

Plant and Machinery: In the case of plant and machinery whether new or second hand, the value will be determined based on the market value of the plant and machinery. If the reinstatement value is used, a suitable escalation for the policy period will be applicable.

In the case of an obsolete machinery, the value is determined by an expert valuer, which is to be ascertained between the insurer and the proposer.

Stocks and Stock In Trade: The value of stocks as well as stock-in-trade is determined by its market value.

Furniture, Fixtures, and Fittings: For determination of the value of furniture, fixtures and fittings, the value is either market value or the reinstatement value basis.

Any items other than mentioned above are to be insured on an agreed value basis.

Check here to know: How fire insurance is important for your business

Case of Sum Insured Decision in Fire Policy

Sukhram Buildtech Pvt. Ltd. is a technology and services firm indulged in estate ownership and management services after a building is complete and occupied.

As a manager of the building and administrator of the residents, Sukhram wants to buy a fire insurance policy for the building which was constructed 20 years back. They submit a proposal of Rs. 25 lakh to the insurer for the fire insurance.

The insurer after estimating the construction cost and depreciation revises the following proposal:

  • The cost of material for similar building in current times: Rs. 55,00,000
  • The cost of labour for the construction of the same: Rs. 750,000
  • Depreciation factor for the building life at 5% p.a.: 2.6533
  • Sum Insured on Depreciated Value Basis: Rs. 23.56 Lakh
  • Sum Insured on Reinstatement Basis (without depreciation): Rs. 62.5 Lakh

The premium will also vary as per the choice of the Sum Insured by the company. Upon consulting with the residents who agree to bear the additional premium, the firm goes for reinstatement value insurance.

Further insurer advises the residents to insure their household contents and valuables as well, as the risk to the building will also affect these assets inside the building. However, each resident must buy this insurance individually.

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