NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Non-Life Insurance Products
Caselet: Arjun runs a small manufacturing unit. His warehouse stock worth Rs 60 lakh is insured for Rs 45 lakh under a fire policy subject to the average clause. A fire destroys stock worth Rs 24 lakh at the time of loss, and the market value of the total stock at the time was Rs 60 lakh. Salvage is ignored. Which amount will the insurer pay?
The insurer will pay Rs 18 lakh. Because the stock is underinsured (Rs 45 lakh against Rs 60 lakh value), the average clause scales the Rs 24 lakh loss by 45/60, giving Rs 18 lakh, and Arjun bears the remaining Rs 6 lakh.
- ARs 24 lakh
- BRs 18 lakhCorrect
- CRs 45 lakh
- DRs 15 lakh
Explanation
Claim = loss x sum insured / value at risk = 24 x 45/60 = Rs 18 lakh. Rs 24 lakh ignores underinsurance. Rs 45 lakh wrongly pays the full sum insured. Rs 15 lakh wrongly uses 24 - 45/60 type logic or a wrong ratio.
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