Under Standard Fire Insurance Policy, most of the proposers select the sum insured as per the value they have mentioned in their books of accounts. Some of the proposers take the fire policy for the market value for their building and/ or machinery.

In case of a loss, the insurer/surveyor usually take the following method to work out the loss.

1. First, they will work out the value for construction of the same type and measurement of the building as on the date of loss in case of building. In case of machinery, they used to get the quotation from this same manufacturer of the machine for the same capacity and work out the cost including installation charges. This they will consider as Reinstatement Value.
2. From the above, they will work out the value of the building/machinery according to the date of construction/date of purchase by applying proportionate depreciation per year, which varies according to the usage of building/type of machinery and arrive at the cost as on date. This is called Value at Depreciated Cost which is called The Market Value.

IN CASE OF LOSS: In case of loss the Sum Insured is less than the Depreciated Value, the difference is taken as Under Insurance and this % will be applied on partial loss settlements.

For Example:

Sum Insured for Building / Machinery                     Rs 50,00,000

Depreciated value of Building / Machinery              Rs.70,00,000

Actual loss assessed after applying depreciation    Rs.30,00,000

Hence the loss to be paid = Rs.50,00,000

.                                            ——————– X RS.30,00,000 = Rs.21,42,857

.                                            Rs.70,00,000

Hence the loss after adjusting the under insurance is Rs.21,42,857

The net payable loss would be subject to the policy condition such as deduction of salvage and policy excess.

This is the impact of underinsurance in the case of Building/Machinery.
In case of stock: If the total stock value is more than the sum insured then also under insurance will be applied.

For Example :

Sum Insured                                        Rs.1,00,00,000

Value of stock at the time of fire          Rs.1,20,00,000

Loss Due to fire assessed                   Rs.50,00,000

Hence the loss payable is = Rs.1,00,00,000

.                                            ———————– X Rs.50,00,000 = Rs.41,66,666

.                                            Rs.1,20,00,000

The net payable loss would be subject to the policy conditions such as deduction for salvage and policy excess.

THAT IS FOR THE DIFFERENCE IN THE MARKET VALUE AND THE SUM INSURED, THE INSURED IS CONSIDERED TO BE OF HIS OWN INSURER.

REINSTATEMENT VALUE INSURANCE (RIV):

While taking insurance for Building/machinery it is always advisable to insure for the PRESENT DAY REPLACEMENT VALUE.

In the RIV policy depreciation will not be applied for Building/Machinery.

But however under Insurance will be applied in case there is a difference in value at the time of Loss.

In RIV policies the claim will be settled only after the Reinstatement of the Building/machinery by the same size capacity, model and make.