NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Non-Life Insurance Products
Ramesh's house is insured for its full value of Rs 50 lakh under a fire policy with no average clause issues. A fire causes a loss of Rs 8 lakh. Separately, a neighbour's shop with a sum insured of Rs 20 lakh and actual value of Rs 40 lakh suffers a Rs 10 lakh loss, and the policy has an average clause. What does the neighbour receive?
The neighbour receives Rs 5 lakh. With the average clause, the claim is reduced in proportion to underinsurance: the shop is insured for Rs 20 lakh against a value of Rs 40 lakh, so only half of the Rs 10 lakh loss is payable.
- ARs 10 lakh
- BRs 5 lakhCorrect
- CRs 20 lakh
- DRs 8 lakh
Explanation
Under the average clause, claim = loss x (sum insured / actual value) = 10 lakh x 20/40 = Rs 5 lakh. Paying Rs 10 lakh ignores underinsurance. The shop is insured for only half its value, so only half the loss is paid.
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