Property Insurance

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Underinsurance refers to inadequate insurance coverage of the policyholder. In this article, we’ll get to know how 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. The reinstatement 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 that is in proportion to the covered and uncovered sum insured. The actual amount of the 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.