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

Mr. Rakesh Menon insured his shop stock, worth Rs 10 lakh at market value, under a fire policy with a sum insured of Rs 6 lakh. The policy contains an average clause. A fire causes a genuine loss of Rs 4 lakh. Ignoring excess and salvage, how much will the insurer pay?

The insurer pays Rs 2,40,000. Because the stock is underinsured, the average clause reduces the claim in proportion: sum insured Rs 6 lakh divided by value Rs 10 lakh is 60%, and 60% of the Rs 4 lakh loss is Rs 2.4 lakh.

  1. ARs 4,00,000
  2. BRs 2,40,000Correct
  3. CRs 6,00,000
  4. DRs 1,60,000

Explanation

Under average, payment = (Sum insured / Value at risk) x Loss = (6/10) x 4,00,000 = Rs 2,40,000. Check: he is insured for 60% so bears 40% of the loss, i.e. Rs 1,60,000. Rs 4,00,000 ignores the clause, and Rs 1,60,000 is the uninsured portion rather than the payment.

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