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

In a standard fire and special perils policy in India, which of the following is normally the basis on which the sum insured for the building should be fixed to avoid underinsurance?

The sum insured for a building under a fire policy should be set on its reinstatement or replacement value, or on the depreciated value if that basis is chosen. Land value is excluded, and loan or historic cost figures do not measure the exposure, so they risk underinsurance.

  1. AMarket value of the land on which the building stands
  2. BReinstatement or replacement value of the building, or its depreciated value if the policy is on that basisCorrect
  3. CLoan amount outstanding against the building
  4. DOriginal construction cost adjusted for none of the changes since construction

Explanation

The sum insured should reflect the value that would be needed to replace the property (or its depreciated value under a market/depreciated basis policy). Land is not insured under a fire policy because it is not destroyed by fire. The loan amount and historic cost do not reflect the actual exposure and may cause underinsurance.

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