Fire claim: reinstatement basis, underinsurance and debris removal
A plastic moulding unit in Pune suffered a fire on 14 March. The Standard Fire and Special Perils policy was issued on a reinstatement value basis for building and machinery, and on a market value basis for stock. Sum insured: building ₹3 crore, machinery ₹2 crore, stock ₹1 crore. The surveyor’s assessment at the loss date is: reinstatement cost of building ₹4 crore, machinery ₹2.5 crore; market value of stock ₹1.5 crore. Damage assessed: building ₹80 lakh, machinery ₹60 lakh, stock ₹50 lakh. Salvage realised ₹10 lakh. The policy has a 5% excess on each claim and a debris-removal limit of 1% of the sum insured of the damaged property. The insured incurred ₹12 lakh on debris removal, of which ₹8 lakh relates to the building. The insured argues that because the policy is on reinstatement value basis, the full damage should be paid without average. You are the appointed surveyor.
1. Compute the admissible claim for each item, showing how the average clause and excess apply. State the net payable amount and the assumptions you make.
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Treat each item separately for average. Building: sum insured ₹3 crore against reinstatement value at risk ₹4 crore, so the policy is 75% insured. Admissible damage = ₹80 lakh × 75% = ₹60 lakh. Machinery: ₹2 crore against ₹2.5 crore = 80% insured. Admissible = ₹60 lakh × 80% = ₹48 lakh. Stock: ₹1 crore against market value ₹1.5 crore = 66.67% insured. Admissible = ₹50 lakh × 66.67% = ₹33.33 lakh. Deduct salvage ₹10 lakh from the stock claim, giving ₹23.33 lakh. Debris removal: the clause limits payment to 1% of the sum insured of the damaged property. For the building, 1% of ₹3 crore = ₹3 lakh; the actual building debris cost of ₹8 lakh exceeds this, so allow ₹3 lakh. The balance of ₹4 lakh relates to other property and must be checked against the relevant item limit. Total before excess = ₹60 lakh + ₹48 lakh + ₹23.33 lakh + ₹3 lakh = ₹1,34.33 lakh. Apply 5% excess = ₹6.72 lakh; net payable = ₹1,27.61 lakh. State in the report that the excess is applied once on the total admissible claim; if the policy requires item-wise excess, the figure will change.
2. The insured argues that reinstatement value basis means no average. How do you answer this in your report?
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The argument confuses basis of valuation with adequacy of sum insured. Reinstatement value basis means that, where the insured actually reinstates, depreciation is not deducted from the damage assessment; it does not remove the average condition. The policy requires the sum insured to represent the full reinstatement value of the property at the date of loss. If it does not, the average clause applies to the extent of underinsurance. Here the building and machinery sums insured are below the assessed reinstatement values, so average must be applied. The correct advice is that the insured should revise sums insured at each renewal on a reinstatement cost basis and not treat the policy as a guaranteed full-value cover. The report should show the reinstatement values, the sums insured, the percentage underinsurance and the resulting reduction, so the insurer can explain the settlement clearly.
3. What documents and checks would you require before finalising the debris removal and salvage figures?
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For debris removal, obtain itemised contractor invoices, measurement sheets, disposal receipts, weighment records and photographs showing debris before removal. Confirm that the work was necessary because of the insured peril and that the cost does not include improvements, new construction or removal of pre-existing waste. Check whether any salvage was sold as part of the debris and deduct it. For salvage, obtain the sale invoice, weighment or quantity records, buyer details and evidence that the sale was at arm’s length. Confirm that the salvage is not also included in the damage assessment. If the insurer sells salvage through its own process, state the net salvage value separately. The report should reconcile damage, debris and salvage so that no item is paid twice.