G Textiles Pvt. Ltd. Co. availed a Standard Fire and Special Perils Insurance Policy as per the standard format for factory building and machinery and also for stocks as given below. Insurance coverage for the building a

The amount of underinsurance in case of building and machinery and the total claims amount payable by the Insurance Company under the FIP is as follows: In order to discourage under-insurance, fire insurance policies often include an average clause. The effect of this clause is that if the amount of the policy is less than the value of the subject-matter insured, the insurer will be liable only for that proportion of the loss which the amount of policy bears to the total value of the subject matter. For example, if stock worth ₹ 4 lakh is insured only for ₹ 3 lakh and if the loss amounts to ₹ 1,80,000, the claim admitted by the insurer will be ₹ 1,80,000 x 3,00,000/4,00,000 = ₹ 1,35,000. Insurance for the building and machinery are on Reinstatement Value (RIV) basis. Under Insurance for Building: Sum Insured / R.I. Value x 100 = 2,80,00,000 / 4,00,00,000 x 100 = 70% Hence Under Insurance is 30% i.e. ₹ 37,12,500 Under Insurance for Machinery: Sum Insured/R.I. Value x 100 = 7,20,00,000 / 9,00,00,000 x 100 = 80% Hence the Under Insurance is 20% i.e. ₹ 31,50,000 Assessment of Loss Building Building has been fully reinstated. Therefore, as per the RIV clause no deduction for depreciation needs to be made on the surveyor's assessment. Surveyor's assessment before under insurance ₹ 1,23,75,000 Taking into account under insurance of 30% ₹ 37,12,500 Net Amount of claim for Buildings (A) ₹ 86,62,500 Machinery Totally destroyed machinery was not reinstated, hence settlement under the policy will be only depreciated value basis for these machinery. Surveyor's assessment on this machinery before under insurance ₹ 1,57,50,000 Under Insurance of 20% ₹ 31,50,000 Net amount payable for totally destroyed machinery ₹ 1,26,00,000 Partially damaged machinery -Repair cost as per surveyor ₹ 50,62,500 Total claim for machinery (B) ₹ 1,76,62,500 Stocks As there is no under insurance Amount of loss as assessed by the surveyor ₹ 27,00,000 Amount of claim for stocks (C) ₹ 27,00,000 Total amount of claim (A+B+C) ₹ 2,90,25,000 Compulsory excess 5% of the claim amount ₹ 14,51,250 Total Net amount of claim ₹ 2,75,73,750