Under the Fire Insurance policy the Underwriters agree that “If after payment of the premium the Property Insured described in the said Schedule or any part of such Property be destroyed or damaged by any of the perils specified hereunder during the period of insurance named in the said schedule or of any subsequent period in respect of which the Insured shall have paid and the Company shall have accepted the premium required for the renewal of the policy, the Company shall pay to the Insured the value of the Property at the time of the happening of its destruction or the amount of such damage or at its option reinstate or replace such property or any part thereof”.
The policy is also subject to average clause, which is: “If the property hereby insured shall at the breaking out of any fire or at the commencement of any destruction of or damage to the property by any other peril hereby insured against be collectively of greater value than the sum insured thereon, then the insured shall be considered as being his own insurer for the difference and shall bear a ratable proportion of the loss accordingly. Every item, if more than one, of the policy shall be separately subject to this condition.”
Therefore, it is of utmost importance that the Sum Insured be adequate to avail the complete benefits under the Insurance policy. The Sum Insured is fixed by the proposer and is the maximum limit of Underwriters under the policy.
The Sum Insured determines the premium payable for the Insurance Policy and should represent the actual value of the property to be insured. Excessive Sum Insured gives the no advantage to the Insured as the claims are subject to the Principal of the Indemnity. If the proposer chooses to have a lower Sum Insured than the value of the property, then the average clause will restrict the claim to the share of the property Insured.
The following aspects are important for the valuation and fixing of Sum Insured:
a) Insurance on Reinstatement value v/s Market value:
The property can be insured in the Reinstatement value clause wherein the basis of loss settlement is the value of new equivalent property without deducting any depreciation thereon. This helps the Insured to replace his property at the cost incurred by him without the use of his personal resources. On the other hand, the market value is the value of the property at which the property of same age and condition can be brought or sold. Under the valuation at market value both depreciation due to age, wear & tear and appreciation due to inflation has to be taken in to account.
b) Sum Insured of Building:
In case of loss to building, the building foundation does not get damaged; hence, usually the buildings are insured above plinth level. Similarly the valuation of the building must be for the constructed portion above the plinth level and should include Walls (including doors and windows), Roof, False ceiling, Floor, items imbedded in to the walls and roofs such as Electricals, wiring and sanitary fittings etc, which become part of the building, should also be mentioned in the description of the policy in order to avoid future misunderstanding.
Boundary walls, though part of a complete building, should also be specifically described or separate Sum Insured thereon has to be provided. Basement also should be specifically described or separate Sum Insured thereon has to be provided to avoid confusion thereafter. Only in the case of earthquakes/Act of God perils that the foundation and construction below the plinth need insurance and should be specifically described or separate Sum Insured thereon has to be provided to avoid future confusion.
The original cost of the building or the book value of the building has no direct relevance to the Sum Insured unless it can form an aid to its present valuation. For example an Industrial building may have the book value of Rs.10000/- only but may be Insured for a million Rupees as per its valuation. However for new building the cost or Written Down Value can provide a good insight to its present valuation
Generally valuation of the building is determined by the built-up area and its constructional specification duly considered with the present cost of construction of similar buildings. An opinion can be obtained from any Civil Engineer or Architect for valuation on market value or Reinstatement Value Basis and the Sum Insured thereby are fixed accordingly for the fire policy.
c) Sum Insured of the Plant & Machinery and FFF:
Plant & Machinery and Furniture Fixtures and Fittings can also be insured on Reinstatement Value or Depreciated Value basis (Market value basis).
The major factor that have to be taken in the account are in the age of Plant and Machinery, change in technology if any, availability of equivalent or similar machinery in the market and their cost, out put capacity of the machinery, output production rate of the machinery, obsolescence if any, indigenous or imported machinery, Cost of the original machinery and finally the inflation prevailing in the market.
A prudent operator in similar industry, wherein the valuation of P & M is to be determined, normally has a fair idea of the factors detailed and can form a good idea of the prevailing valuation. Services of a Plant & Machinery Valuer may be obtained if required. Separate sum Insured should be fixed for P & M and FFF. It is also advisable to have individual sections of the Plant listed and valued separately to avoid lengthy documentation at the time of claim.
d) Sum Insured of Stocks:
Valuation of stocks for the Sum Insured purpose is the basic cost excluding the anticipated profits at the valuation stage. The various stages at which the stocks need to be valued are:
Sum Insured of Raw Materials/ Stores & Spares/Traded Stocks: The cost of the materials as purchased by the insured including Octroi, Freight, Loading/Unloading, Transit Insurance and non recoverable Taxes incurred, these would form the Sum Insured under the fire policy. If the market cost of the materials go down then the same has to be taken in to consideration in view of the principal of the indemnity. The insured’s own expenses on storage, interest and any holding charges cannot be considered. The valuation for the manufacturer or the wholesaler or the retailer will vary for the same product depending upon his cost incurred from his source of purchase. It is desirable to have separate Sum Insured for Raw Materials/ Stores & Spares/Traded Stocks.
Sum Insured of Work in Process: For the manufacturer the work in process valuation has to be carefully worked out after adding the manufacturing costs directly incurred on the raw materials including direct factory overhead which are contributing to the manufacturing cost.
Sum Insured of Finished Goods: The cost of the finished goods is net manufacturing cost including factory overhead. Administrative cost, sales overhead and net profits are not taken into consideration for valuation of finished goods. The excise duty can be added to the finished goods if it has already been incurred. The valuation of the finished goods can also be arrived at after deducting the un-incurred costs and the Gross Profit from the sale price of the stocks.
Sum Insured of Waste Materials: Waste materials accumulate during operations. They also have commercial value. Normally they are sold periodically. The market rates thus available can form the basis of their valuation
e) Agreed Value Policies:
It is not a practice of the Insurance Industry in India to issue Valued Policies where in the Sum insured is admitted at the time of issue of Policy and the Policy will not be subject to Average Clause. Imported Good under contract can form an exception.
By Mr. Sumant Sud, Chartered Engineer, Surveyor & Loss Assessor, Amritsar, Published in The Insurance Times, January, 2011