Fire Loss, Average Clause and Contribution Between Insurers
Kaveri Polymers runs a moulding unit in Pune. Its property policy with Insurer A, running July 2024 to June 2025, covers plant and machinery, stock and building on a reinstatement value basis for a sum insured of ₹8 crore, with an average (under-insurance) condition and a fixed ₹10 lakh excess on each claim. The plant and machinery was valued at a reinstatement cost of ₹12 crore in March 2024. A financier holding a term loan against the machinery separately insured 'plant and machinery' with Insurer B for ₹6 crore, with the same average condition, the same ₹10 lakh excess and the same 12-month reinstatement period. In January 2025 a fire destroyed machinery whose reinstatement cost is ₹6 crore; its depreciated value on the date of loss was ₹3.6 crore. The insured has not replaced the machinery and wants a cash settlement now. Both insurers have received the claim; each argues that the other should bear the larger share.
1. Ignore contribution for the moment. Compute each insurer's independent liability for the machinery loss and explain the effect of the average condition.
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Insurer A. Sum insured ₹8 crore; value at risk on the same basis ₹12 crore. The average factor is 8/12 = two-thirds. Applied to the loss of ₹6 crore it gives ₹4 crore. The clause is not a penalty for accidental under-insurance: it places the insured in the position it would have occupied had it insured for the full value, sharing the loss in the same proportion in which it shared the premium.
Insurer B. Sum insured ₹6 crore; value at risk ₹12 crore. Factor 6/12 = one-half. Liability is ₹3 crore.
Total independent liability is ₹7 crore against a loss of ₹6 crore, so the insured must not recover more than ₹6 crore in all: that is the indemnity principle, and it is why contribution follows.
Two cautions. First, the value at risk must be measured on the same basis as the sum insured. Both policies are on reinstatement value and ₹12 crore is the reinstatement cost, so the comparison is valid; had one policy been on market value, the denominator would differ. Second, policy A's sum insured of ₹8 crore covers building, plant and stock together while the loss is to machinery only. Under a single sum insured this is not fatal, but the insurer should check whether the policy applies the average to each item separately; if it does, the denominator would be the machinery value alone and the arithmetic changes materially.
2. Does contribution apply, and how should the loss be shared between A and B? State the conditions and the method.
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Conditions for contribution: the same subject matter (the machinery), the same interest (Kaveri Polymers' ownership interest, insured for its own account and that of the financier as loss payee), the same peril (fire), and policies covering the same loss rather than complementary covers. Both policies satisfy all four. That the financier arranged policy B does not create a different interest; a loss payee clause does not create a separate insurable subject matter.
Method - independent liability. Each insurer's standalone liability is computed first (A ₹4 crore, B ₹3 crore) and they then share the loss pro rata to those figures, because the total exceeds the loss:
- A: 6 × 4/7 = ₹3.43 crore
- B: 6 × 3/7 = ₹2.57 crore
Excess. Each policy carries a fixed ₹10 lakh excess. The usual treatment is that each insurer deducts its own excess from its share, leaving A at ₹3.33 crore and B at ₹2.47 crore, with a shortfall of ₹0.20 crore borne by the insured. The insured cannot ask A to absorb B's excess, though some wordings allow the excess to apply once per event; read the clause before issuing the settlement.
Recoveries. Once B pays, B is subrogated to the insured's rights against any third party; neither insurer can subrogate against the other insured. Contribution is a right between insurers, not a route to a second recovery for the insured.
3. The insured wants cash and will not replace the machinery. How does the reinstatement condition alter the settlement, and what happens to the average calculation in that case?
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The condition. A reinstatement value policy promises the cost of replacing the property, not its depreciated worth. It is given on the footing that the property will actually be reinstated, and it typically provides that payment is made on or after reinstatement (or provisionally, subject to adjustment) and that if the property is not reinstated within the stated period - here twelve months - the basis of settlement reverts to market (depreciated) value. The insured cannot take the benefit of a reinstatement sum insured while electing a cash settlement on depreciated value.
The consequence for average. If settlement moves to market value, the denominator must move with it. The value at risk on a depreciated basis is not ₹12 crore. The file gives ₹3.6 crore as the depreciated value of the destroyed machinery alone, and the whole plant's depreciated value will be well below the reinstatement figure. On that basis a sum insured of ₹8 crore may exceed the value at risk, so no average applies and the loss is measured at the depreciated figure, capped by the sum insured.
Practical handling. Before settling on the reinstatement basis, confirm the reinstatement period in the policy and whether the insurer will extend it. Put the choice to the insured in writing: reinstate within the balance of the period and be paid on that basis, or take a market-value settlement computed on a re-measured value at risk. Do not apply the reinstatement-basis average factor and then also deduct depreciation - that double-counts the under-insurance and is the commonest error overturned in grievance proceedings.