A ₹6 lakh fire policy on ₹12 lakh of stock, and a PMSBY card that does not cover illness
Ramesh, 45, runs a tailoring shop in Panipat. His stock of cloth, finished garments, three sewing machines and furniture is worth about ₹12,00,000 at current prices. His standard fire policy, bought three years ago and never revised, has a sum insured of ₹6,00,000 and carries an excess of ₹5,000 on each claim. In December a fire destroys cloth and garments worth ₹4,00,000 and damages one machine beyond repair. Ramesh has paid ₹20 a year for PMSBY through his bank and tells everyone that "the bank insurance will give my family ₹2 lakh if anything happens to me". He has two employees; one of them is burnt on the arm while trying to douse the fire, and Ramesh pays ₹18,000 for treatment out of his own pocket. He has no policy covering employees and is not registered under ESI. He files the fire claim and expects to receive the full ₹4,00,000.
1. Work out what the fire claim will actually pay, and explain the principle that produces this figure.
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Step 1 - identify the principle. Fire insurance is a contract of indemnity: it restores the insured to the position before the loss, it does not pay more than the loss and it does not allow profit.
Step 2 - apply the average (under-insurance) clause. The sum insured (₹6,00,000) is less than the value of the property at risk (₹12,00,000). The policy pays the same proportion of the loss as the sum insured bears to the value at risk:
- Claim before excess = (Sum insured ÷ Value at risk) × Loss
- = (6,00,000 ÷ 12,00,000) × 4,00,000
- = 0.5 × 4,00,000 = ₹2,00,000
Step 3 - deduct the policy excess. ₹2,00,000 − ₹5,000 = ₹1,95,000 payable.
Step 4 - state the shortfall. He bears ₹4,00,000 − ₹1,95,000 = ₹2,05,000 himself, because he insured only half the value while paying only half the premium that full cover needed. Insurers do not treat this as unfair: the premium collected must match the risk carried.
Step 5 - the fix. Revalue the property at each renewal and raise the sum insured to ₹12,00,000 (or take a reinstatement-value policy, and for fluctuating stock a declaration policy), and ask for the average clause's implications in writing before the next renewal.
2. Ramesh expects PMSBY to pay ₹2 lakh "if anything happens". Explain what PMSBY actually covers and what he should buy for the gap.
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What PMSBY is: the Pradhan Mantri Suraksha Bima Yojana is a one-year, renewable accident cover of ₹2 lakh, with an annual premium of ₹20, auto-debited from a bank account, available to a person aged 18 to 70 years, one cover per person. It pays for:
- death due to accident, and
- total and irrecoverable loss of both eyes, or of two limbs, or of one eye and one limb (total permanent disability) due to accident; partial disability is covered at a lower amount.
What it is not: it is not a life cover and not a health cover. Death from illness - a heart attack, cancer, kidney failure, Covid - is not an accident and is not payable. So his statement to neighbours is wrong, and his family would get nothing from PMSBY if he died of a heart attack.
The gaps and the matching products:
- Death from any cause: PMJJBY - ₹2 lakh life cover at ₹436 a year, ages 18 to 50, auto-debit, one cover per person. Note the 30-day waiting period from first enrolment for non-accidental death and the exclusion of suicide in the first year.
- Hospitalisation: a health indemnity policy for himself and his family, plus the employees' cover discussed next; a ₹18,000 burn treatment bill or a ₹1 lakh hospitalisation is neither an accident death nor a disability, so no accidental policy will pay it. Only a health policy or the employer will.
3. The injured employee is not covered by ESI or a workmen's policy. Who bears the cost, and what should Ramesh do before the next accident?
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Who bears it now: Ramesh does. With no Employees' State Insurance cover (his establishment has only two employees, so ESI does not apply) and no workmen's compensation policy, the liability for a workplace injury falls on the employer. He has already paid ₹18,000 from his own funds; a more serious injury could mean wages during absence, permanent disability compensation and legal costs.
Before the next accident:
- Group personal accident policy for both employees - cheap per employee, pays accidental death and disability, and often includes hospital cash. For a two-person shop this is the practical substitute for ESI.
- Workmen's compensation (employees' compensation) policy if he later takes on more staff or does contract work for larger firms, since such firms demand it.
- Fire-safety and workplace measures: no loose wiring near cloth stock, a fire extinguisher and sand bucket, a first-aid box, no smoking in the stock room, and an emergency exit that is not blocked by bales.
- Document the accident - date, time, what happened, treatment bills - because insurers and any future claim will ask for it.
Underlying judgement: insurance is the last line, not the first. The cheapest rupee he can spend is on preventing the electrical fault that starts the fire.