Insurance Loss Assessment

How do general insurance companies calculate claim to be paid under fire insurance:

Fixed Assets

Standard fire Policy

Description Amount
Replacement Value as new at the time of loss 100,000
Less: Depreciation, say @ 25% of above 25,000
Value at risk 75,000
Sum Insured under the Policy Item 50,000
Amount under-insured by 25,000
Cost of repairs and replacements carried out 75,000
Less: Depreciation, say @ 25% of above 18,750
Depreciated cost of repairs and replacements 56,250
Less: Salvage value, say @ 10% of repairs/replacement cost 7,500
Loss Assessed 48,750
Less: pro-rata average application 16,250
Net Claim Assessed 32,500

Notes:

  • Fixed Assets would generally include:
    • Building (excluding plinth and foundation [which can be insured separately for earthquake])
    • Plant, Machinery & Accessories
    • Electrical Installations (can also be included in the above depending on its purpose)
    • Furniture, Fixture and Fittings,
    • Office Equipment
  • The above is as per the new tariff and wordings applicable from May 2000. Under an older Policy, excess or deductible would be adjusted further, on the aggregate claim amount, depending on the type of claim (fire, flood, etc.)
  • Under the new Policy wordings, deductible or excess is 5% of claim amount for all flood, storm, cyclone, etc., lightning, and landslide/subsidence related claims.
  • Repairs and replacements must be of same type or kind. Any improvements would be adjusted suitably.
  • Depreciation is technical and subjective in nature, based on various factors like:
    • estimated useful life
    • technical and technological obsolescence
    • efflux of time
    • condition and type of asset, etc.
  • In the above example, if the sum insured was 75,000 then no deduction for pro-rata average would be made.
  • The above working and assessment would be made for each and every item insured under the Policy, separately.
  • When Reinstatement Value Clause is specifically requested and endorsed, the claim computation changes as shown below. There is no extra cost for taking the said Clause.

Reinstatement Value Clause Policy

Description Amount
Replacement Value as new at the time of reinstatement completion 100,000
Sum Insured under the Policy Item 50,000
Amount under-insured by 50,000
Cost of repairs and replacements carried out 75,000
Less: Salvage value, say 10% of above 7,500
Loss Assessed 67,500
Less: pro-rata average application 33,750
Net Claim Assessed 33,750

Further Notes:

  • Repairs and replacements must be of same type or kind. Any improvements would be adjusted suitably.
  • Unless otherwise permission is granted, a time period of one year is allowed for such completion of repairs and replacements.
  • In the above example, if the sum insured was 100,000 then no deduction for pro-rata average would be made.
  • The above working and assessment would be made for each and every item insured under the Policy, separately.

 

Stocks

Standard Fire Policy

Description Amount
Market Value of total Stocks / Stocks-in-process at the time of loss 100,000
Sum Insured under the Policy Item 50,000
Amount under-insured by 25,000
Market Value of affected stocks / stocks-in-process 75,000
Less: Salvage value, say @ 10% of 7,500
Loss Assessed 67,500
Less: pro-rata average application 33,750
Net Claim Assessed 33,750

Notes:

  • Stocks would generally include:
    • Raw Materials
    • Work-in-progress
    • Intermediates
    • Packing Materials
    • Finished Goods
    • Stores and Spares, etc.
  • The above is as per the new tariff and wordings applicable from May 2000. Under an older Policy, excess or deductible would be adjusted further, on the aggregate claim, depending on the type of claim (fire, flood, etc.) and policy.
  • Under the new Policy wordings, deductible or excess is 5% of claim amount for all flood, storm, cyclone, etc., lightning, and landslide/subsidence claims.
  • In the above example, if the sum insured was 100,000 then no deduction for pro-rata average would be made.
  • When Declaration Clause is specifically requested and endorsed, the claim computation changes as shown below. There are certain criteria and conditions to be fulfilled for taking the said Clause.

Stocks Declaration Fire Policy

Description Amount
Market Value of total Stocks / Stocks-in-process at the time of loss 100,000
Sum Insured under the Policy Item 50,000
Amount under-insured by 25,000
Declaration value received by the Insurers immediately prior to loss occurrence 50,000
Declaration value that ought to have been made 75,000
Amount under-declared 25,000
Market Value of affected stocks / stocks-in-process 75,000
Less: Salvage value, say @ 10% of 7,500
Loss Assessed 67,500
Less: pro-rata average application 33,750
Net Claim before under-declaration adjustment 33,750
Less: pro-rata under-declaration adjustment 11,250
Net Claim Assessed 22,500

Further Notes:

  • Stocks eligible for Declaration Clause would generally include:
    • Raw Materials
    • Intermediates
    • Packing Materials
    • Finished Goods
    • Stores and Spares, etc.
  • The stocks should be stored at specified storage locations
  • In the above example, if the sum insured was 100,000 then no deduction for pro-rata average would be made.
  • In the above example, if the declaration made was 75,000 then no deduction for pro-rata under-declaration would be made.
Author Info

Bhupendra Bhandari

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