Fire Loss with Underinsurance and Reinstatement Value Condition
A pharmaceutical warehouse in Pune is insured under a Standard Fire and Special Perils policy for Rs 6 crore on a reinstatement value basis, covering building, plant, stock and furniture. A fire on 12 March destroys part of the stock and damages the roof. The insured intimates the claim on 13 March and the insurer appoints you on 14 March. Your assessment shows the reinstatement cost of the entire insured property at the date of loss is Rs 8 crore; the loss assessed on reinstatement basis is Rs 1.5 crore; salvage realised is Rs 12 lakh. The insured has not yet rebuilt or replaced the damaged property and says it will do so next financial year. The policy contains the standard average (underinsurance) condition and a reinstatement value clause requiring reinstatement within 12 months. The policy excess is Rs 50,000. The insured argues that because the sum insured was fixed by the insurer's agent after a site visit, the average clause should not apply.
1. How should you apply the average clause and compute the admissible loss? Show the calculation and explain the treatment of salvage, excess and the reinstatement condition.
Read the worked answer
The average clause compares the sum insured with the value of the entire insured property at the date of loss, not with the value of the damaged part. Here the ratio is Rs 6 crore / Rs 8 crore = 75%, so the insured is his own insurer for the remaining 25%.
Assessed loss on reinstatement basis: Rs 1.50 crore. Deduct salvage Rs 0.12 crore to arrive at the net loss: Rs 1.38 crore. Apply 75%: Rs 1.38 crore × 75% = Rs 1.035 crore. Deduct policy excess Rs 0.05 crore: Rs 0.985 crore (Rs 98.5 lakh).
However, the reinstatement value clause makes the insurer liable on reinstatement basis only if the insured actually reinstates within 12 months. Since the insured has not yet done so, the report should assess the depreciated/market value of the damaged property as an alternative and apply the same average method to that figure. The insurer may pay on market value now and hold the reinstatement benefit subject to proof of reinstatement, or obtain a suitable undertaking. The report must state the method clearly. If the insurer's practice is to apply average to the gross loss before deducting salvage, the figure would differ; consistency and disclosure of the method matter more than the arithmetic alone.
2. Is the insured's argument about the insurer's agent's site visit relevant to the average clause? Discuss the surveyor's position.
Read the worked answer
A site visit by the insurer's agent does not, by itself, waive or override the average clause. The sum insured is a declaration by the proposer, and the agent has no authority to rewrite policy conditions or to certify that the sum insured equals reinstatement value. Estoppel requires a clear representation of fact, reliance by the insured and detriment; a routine inspection is not such a representation. The insured, a commercial buyer, also has a duty of utmost good faith to disclose the full value of the property.
The surveyor should record the argument, obtain the proposal form, correspondence and any written assurance given by the agent, and state the contractual position. If there was a specific written representation by the insurer that the sum insured was adequate, the insurer may need to take a legal view on estoppel, but that is not the surveyor's decision. The surveyor must not reduce or inflate the assessment to accommodate the dispute.
3. What should your report recommend on reinstatement, depreciation and future sum insured?
Read the worked answer
The report should recommend payment of Rs 98.5 lakh on reinstatement basis only against proof of reinstatement within the policy period, supported by invoices and a completion certificate. If reinstatement is not carried out, the claim should be settled on the depreciated/market value of the damaged property, with the same average ratio applied. The salvage of Rs 12 lakh should be either taken over by the insurer or its value deducted, and the policy excess of Rs 50,000 should be applied once.
The surveyor should also recommend that the insurer review the sum insured at renewal using a professional valuation, because the property is underinsured by 25%. The insured should be advised in writing that the average clause will operate again at renewal if the sum insured remains below reinstatement value. These recommendations are advisory; the surveyor should not purport to decide coverage disputes or bind the insurer.