A Fire Claim with Underinsurance, Salvage and a Consequential-Loss Demand
A fire on 12 February damaged a stock godown insured under a standard fire and special perils policy. The sum insured on stock is ₹40 lakh. The surveyor assesses the value of stock at risk on the date of loss at ₹50 lakh and the gross loss at ₹20 lakh. Salvage of the damaged stock realises ₹2 lakh. The policy carries a per-claim excess of ₹25,000 and a debris-removal sub-limit of 1 per cent of the sum insured; the insured spent ₹60,000 on debris removal. The insured also claims ₹3 lakh as loss of market because supplies to two buyers could not be made, arguing that the electrical short circuit that started the fire was a risk the company had accepted and that the whole loss, including consequential loss, must therefore be paid. The surveyor's report is signed by only one of the two joint surveyors, and the insured's broker is pressing for settlement within seven days.
1. Compute the amount payable on the stock damage, showing each step.
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Step 1 - establish the loss. Gross loss ₹20,00,000 less salvage realised ₹2,00,000 = net loss ₹18,00,000. Salvage is deducted because the insured no longer bears that part of the loss; the salvage itself belongs to the insurer once the claim is paid.
Step 2 - test for underinsurance. Sum insured ₹40,00,000 against value at risk ₹50,00,000, so the policy is underinsured and the average (under-insurance) condition applies. Proportion = 40/50 = 0.8.
Step 3 - apply the average clause. 18,00,000 × 0.8 = ₹14,40,000. The insured absorbs ₹3,60,000 because only four-fifths of the value was insured.
Step 4 - deduct the policy excess. 14,40,000 − 25,000 = ₹14,15,000 payable on the stock damage (before the debris item).
Step 5 - the common errors to avoid. Applying average to the gross loss before salvage (gives 16,00,000 and overpays by ₹1.6 lakh); applying average to the sum insured instead of the loss; or deducting the excess from each item of loss instead of once per claim. The insurer's liability can never exceed the sum insured, which is not a constraint here.
2. How should the debris-removal claim and the ₹3 lakh loss-of-market claim be dealt with?
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Debris removal. The sub-limit is 1 per cent of the sum insured = ₹40,000. The insured spent ₹60,000, so ₹20,000 is outside the cover absolutely. On the ₹40,000 that is within the sub-limit, the under-insurance condition applies as it does to the rest of the claim, since the sub-limit sits inside the same sum insured: 40,000 × 0.8 = ₹32,000 admissible. Adding this to the stock figure gives ₹14,72,000 gross, and if the excess is applied once to the whole claim the total payable is 14,72,000 − 25,000 = ₹14,47,000; the alternative treatment, applying the excess to the stock item only and paying debris in full at ₹32,000, should be checked against the policy wording and applied consistently.
Loss of market - not payable. The policy indemnifies physical damage to the insured property. Loss of profit or loss of market is a consequential loss and is covered only under a separate loss-of-profit (fire) policy, generally following a material-damage trigger with its own sum insured and waiting period. The insured's argument that the short circuit was an accepted peril confuses proximate cause with scope of cover: the peril being covered makes the fire damage payable, it does not convert remote economic loss into physical damage. Even an accepted peril does not extend the policy to heads of loss that are excluded.
3. The broker demands settlement in seven days on a report signed by only one joint surveyor. What should the insurer do, and what are its rights after payment?
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On the survey report. A joint survey requires both surveyors to sign; a report signed by one is not a valid joint report and is a weak foundation for a settlement that may later be challenged. The insurer should not pay on it. The correct course is to have the second surveyor sign, or to record a written dissent with reasons, or - if the disagreement is material - to commission a fresh survey. A licensed surveyor's appointment is mandatory for claims above ₹75,000, so the survey function cannot be dispensed with to meet a deadline.
On the timeline. Seven days is the broker's deadline, not a statutory one. The insurer should acknowledge the claim in writing, state the deficiency in the report and the date by which it expects a complete report, and then settle within the regulatory norm - broadly 30 days from receipt of the survey report. Keeping a dated record of each communication protects the insurer if the delay is later alleged to be unreasonable.
Rights after payment. On paying ₹14,47,000 the insurer is subrogated to the insured's rights of recovery against the party responsible for the fire - here, potentially the electrical contractor - but only up to the amount paid. Any recovery beyond that belongs to the insured. The salvage of ₹2 lakh has already been accounted for, so no separate salvage recovery arises, and the insurer should issue a discharge that records the subrogation and the salvage position before releasing the cheque.