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 workplace. 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 of 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 a greater amount of coverage for the same property. However, if you think that in the case of loss or damage in the future, you will be doubly insured and receive the total sum insured of both property policies, you will have to shed such thoughts. Let’s check out some examples to understand how the claims process will work if the office building, which is insured under two insurance plans, gets damaged.
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 the sum assured provided by each policy.
How will the claim be settled?
If you believe that both of Mr. Sharma’s policies will fully cover and compensate for the entire loss, you should revisit 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 the total value, the insurer will reimburse only 50% of the total claim, i.e. Rs. 250,000.
Second, when the 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 policies.
Total Claim Paid: In this scenario, since both policies have the same sum insured amount, the payable claim of Rs.250,000 will be divided equally between the two insurers.
Therefore, the 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 policies is not equal? In such cases, how will the claim amount be divided?
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, we will prorate the claim since the total insured value exceeded the insurance cover, resulting in proportionate reduction of the claim payment. Therefore, only 75% of the loss (= Rs. 9,00,000) is payable by the insurers. Now that we have estimated the total payable claim, the two insurers will divide the amount in proportion to their respective sum insured.
The first policy will cover one-third of the amount, as its provided coverage (Rs.5,00,000) constitutes just one-third of the total sum insured by both 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 the total sum insured amounts to the same percentage.
No Additional Benefit
Insurance is an instrument of reinstatement of the financial condition of the insured and not for profiteering. Thus, multiple insurances do not lead to greater compensation.
Availing of separate policies can opt 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 proportionately dividing the claim between the two.
Clarify Your Doubts about property policies
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Therefore, stop believing the seller’s information and start receiving relevant and qualified insurance advice from the best.
