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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 issued in India, which of the following is the usual basis on which the sum insured for a building is fixed by the insured?

The sum insured for a building under a fire policy is based on its reinstatement value, meaning the cost of rebuilding it, excluding the value of land. Land cannot be damaged by fire, so including it would only raise the premium without adding any useful protection.

  1. AReinstatement value of the building, excluding land valueCorrect
  2. BMarket value of the land together with the building
  3. CPurchase price paid ten years ago, without any adjustment
  4. DRental income of the building for one year

Explanation

Fire policies on buildings are generally written on a reinstatement or indemnity value basis, and land is not insured because it cannot be destroyed by fire. Including land value would inflate the sum insured and the premium without any added cover. Historical cost or rent are not valid valuation bases.

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