Application of Under-insurance under Fire Declaration policy

In the event of a claim under Fire Declaration policies, Under-insurance is applied two times. First, Policy Sum Insured is compared with total value of stocks at the time of loss and if it is found inadequate, it will attract under insurance. Secondly, Stocks Declaration of the month prior to loss will be compared with the actual average value of stocks held in that month. That means, if a loss has taken place in the month of March then Surveyor would check the declaration of stocks for the month of Feb and if Declaration is found lower than actual value, it will attract second Under-insurance & the claim shall be reduced proportionately.

Example: A Fire declaration Policy is issued with SI of Rs 10 lacs from 1st Jan to 31st Dec. Insured suffered a fire loss of Rs 5 lacs on 15th June. Total stock value as on date of loss was found Rs 14 lacs. Insured submitted Declaration of Rs 6 lacs in the month of May as against the actual value of 7.5 lacs. what would be amount payable to insured considering salvage as nil.

Loss after 1st UI = 5 x 10 / 14 = Rs 3.57 lacs

Loss after 2nd UI = 3.57 x 6 / 7.5 = Rs 2.86 lacs 

Final payable amount = Rs 2.86 lacs less policy excess less Reinstatement premium.

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