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

Mr. Raghav Iyer's house in Pune, with a market value of Rs 80 lakh, is insured under a standard fire and special perils policy for a sum insured of Rs 40 lakh. A fire causes a genuine loss of Rs 10 lakh to the building. Assuming the policy carries the average clause and the sum insured is based on the market value of the property, what amount is payable?

The claim payable is Rs 5 lakh. Because the house is insured for only half its value (40 lakh against 80 lakh), the average clause reduces the settlement proportionately, so the insurer pays half of the Rs 10 lakh loss.

  1. ARs 10 lakh
  2. BRs 5 lakhCorrect
  3. CRs 4 lakh
  4. DRs 2.5 lakh

Explanation

Under the average clause, claim = loss x (sum insured / value of property at risk) = 10 lakh x (40/80) = Rs 5 lakh. Check: the insured has covered only half the value, so bears half the loss. Rs 10 lakh ignores underinsurance, while Rs 4 lakh and Rs 2.5 lakh come from wrong ratios (40/100 or 1/4).

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