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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Non-Life Insurance Products

Caselet: Mr. Khanna runs a small factory. His stock is worth Rs 60 lakh, and he insures it for Rs 45 lakh under a fire policy with an average clause. A fire destroys stock worth Rs 24 lakh. The policy has no deductible, and the value at risk at loss equals Rs 60 lakh. Salvage and other adjustments are nil. Which statement is correct about his claim?

The claim is Rs 18 lakh, with Mr. Khanna bearing Rs 6 lakh. Stock is insured for 45 of 60 lakh, so only 75% of the Rs 24 lakh loss is payable under the average clause. The shortfall is his penalty for underinsurance.

  1. AClaim is Rs 24 lakh since loss is below sum insured
  2. BClaim is Rs 18 lakh and he bears Rs 6 lakh as underinsurance penaltyCorrect
  3. CClaim is Rs 45 lakh as the sum insured
  4. DClaim is Rs 32 lakh as the ratio is 60/45

Explanation

Claim = (45/60) x 24 = 0.75 x 24 = Rs 18 lakh. Check: 24 - 18 = Rs 6 lakh borne by him. Paying Rs 24 lakh ignores the average clause, and Rs 32 lakh inverts the ratio.

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