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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Basics of Insurance

Mr. Iyer's house is insured for Rs 40 lakh under a fire policy with an average clause. The actual value of the house at the time of loss is Rs 80 lakh. A fire causes a loss of Rs 10 lakh. Ignoring deductibles, the claim payable is:

The claim payable is Rs 5 lakh. With an average clause, the insurer pays loss multiplied by sum insured over actual value: Rs 10 lakh times 40/80. Because the house is insured for only half its value, the insured bears half of the loss.

  1. ARs 10 lakh
  2. BRs 5 lakhCorrect
  3. CRs 20 lakh
  4. DRs 4 lakh

Explanation

Under the average clause, claim = loss x sum insured / value = 10 x 40/80 = Rs 5 lakh. Paying the full Rs 10 lakh ignores underinsurance. Rs 20 lakh wrongly inverts the ratio, and Rs 4 lakh uses the wrong base.

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