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

Mr. Rajesh Iyer insures his factory building for Rs 60 lakh under a fire policy with an average clause. At the time of a loss, the actual market value of the building is Rs 80 lakh. A fire causes a loss of Rs 20 lakh. Assuming the average clause applies and there is no deductible, how much would the insurer pay?

The insurer pays Rs 15 lakh. Under the average clause the loss is reduced in the ratio of sum insured to actual value, so 60/80 = 75% of the Rs 20 lakh loss is payable, because the building was underinsured.

  1. ARs 20 lakh
  2. BRs 15 lakhCorrect
  3. CRs 12 lakh
  4. DRs 10 lakh

Explanation

Under the average clause, the claim is paid in the proportion of sum insured to the value at risk. Payment = 20 lakh x (60/80) = 20 x 0.75 = Rs 15 lakh. Paying the full Rs 20 lakh ignores underinsurance. Rs 12 lakh wrongly uses 60% (60/100) as the ratio, and Rs 10 lakh wrongly uses half.

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