Property Insurance

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Underinsurance refers to inadequate insurance coverage of the policyholder. In this article, we’ll get to know how does underinsurance impact fire insurance claim settlement.


If a policyholder is underinsured, it will result in economic losses for him/her in the event of a claim far exceeding any premium savings that might have resulted from underinsurance. Therefore property owners must ensure that sum insured in their policy is optimum to cover either –

  1. The present market value of the asset or
  2. Re-instatement value of the asset provided the defined basis of the claim is market value or reinstatement value.


In case of under-insurance, the insurance company will apply the Average Clause. However, the Average Clause limits the liability of the insurance company to a loss amount which is in proportion to the covered and uncovered sum insured. The actual amount of claim is determined by the below formula:


Claim Payable = (Loss Suffered x Insured Value) / Total Value.


Illustration – Suppose the insured has taken a sum insured of Rs 1,00,000 in the policy for stock which has an actual value of Rs 1,50,000. In the event of a burglary, the insured suffers a loss of Rs. 30,000 of stock. In this scenario, the insurance company will indemnify the insured with Rs 20,000 i.e. 30,000 x 1,00,000/1,50,000 and the balance of Rs 10,000 has to be borne by the insured.