Check Sum Insured in Standard Fire Insurance Policy
Updated On Jan 25, 2024
Accidents involving fires are unexpected and destructive. Along with shaking up your finances, dealing with the aftermath is challenging. Additionally, if the destroyed property is uninsured, a thriving corporation could be in a deadlock. Standard fire insurance is an important form of protection against such losses.
Insurance professionals advise setting the sum insured amount according to the amount invested so that you do not need to invest additional funds.
Sum Insured in Standard Fire Insurance
The sum insured represents the maximum amount of protection at which the insured property is insured against fire-related risks. It is the highest amount of money the business insurance provider will cover in the case of a covered fire loss. It is important to precisely estimate the sum insured to make sure that the amount insured is enough to cover the expenses of rebuilding or repairing the property.
The policyholder normally chooses the amount insured for fire insurance, depending on the value of the property. In the event of a total loss, its value will represent the price of rebuilding or replacing the asset.
Sum Insured Under Standard Fire Insurance: Asset Type
The sum insured under standard fire insurance varies with different asset types being covered. Below are the most commonly insured assets and the basis of their sum insured.
1. Building
The cost of construction, market worth, and the expense of rebuilding or repairing the building are often taken into account when determining the appropriate sum insured for the structure.
The sum insured should correspond to the building's actual replacement value, which considers elements like the cost of construction materials, labor, and any associated fees or licenses.
2. Plant, Machinery, and Equipment
Several elements are frequently taken into consideration when establishing the sum insured for equipment or machinery. These elements could include the equipment's age, condition, market worth, and replacement cost. In the case of a fire-related loss, the insured sum should be sufficient to pay for the cost of repairing or replacing the insured plant or machinery.
To make sure that the insurance coverage is adequate, it is crucial to precisely estimate the plant or machinery's value.
3. Stocks
Several factors are frequently considered when establishing the amount insured for stocks. These could include the price of the stock, its market value, and any other elements unique to the sector or class of commodities being protected.
Sum Insured Under Standard Fire Insurance: Reinstatement Value Vs. Market Value
Two ways are frequently used to assess the sum insured in a typical fire insurance policy: reinstatement value and market value.
1. Reinstatement Value
The amount insured based on reinstatement value represents the cost of restoring the asset or property to its pre-fire condition through repairs, replacement, or construction. It considers the current costs of materials and construction, including labor expenses and professional fees.
2. Market Value
The amount insured based on market value corresponds to the asset or property's current market worth. It takes into account aspects including location, condition, supply and demand dynamics, and other market elements that affect the property's value.
It's crucial to remember that the price you pay for the insurance policy may change depending on whether you choose reinstatement value or market value. As reinstatement value covers the cost of completely restoring or rebuilding the property, its coverage is generally more expensive.
In Conclusion
The maximum amount of coverage offered by a basic fire insurance policy is the sum insured. Depending on the policyholder's preferences, risk tolerance, and the specific requirements of the insured property, either the reinstatement value or market value may be chosen as the amount covered. It is advised to consult an insurance professional or your insurance provider to determine the sum insured to better suit your situation.
FAQs
Q. What is the sum insured by standard fire insurance?
A. Sum insured refers to the amount that an insurance provider must pay out in the case of a covered loss. The sum insured should ideally reflect the asset's market worth.
Q. What should the sum insured for antiques be under a standard fire policy?
A. Market value cannot always be assigned to antiques. It is advised to get the antiques professionally appraised to find out their current market value. Keep thorough records of the antiques, including images, descriptions, purchase receipts, and any other paperwork proving their worth and authenticity. It is also advisable to regularly reevaluate the worth of your antiques to make sure the insurance amount is still sufficient.
Q. What distinguishes the insured sum based on reinstatement value from the insured sum based on market value?
A. When the sum insured is determined by market value, the insurance provider usually pays the property's actual market value at the time of the loss, less any applicable deductibles or policy limits.
Reinstatement value coverage tends to be expensive comparatively as it covers the cost of completely restoring or rebuilding the property.
Q. Which assets are covered by the reinstatement value?
A. The reinstatement value provision only applies to fixed assets like furniture, machinery, and other stationary items like buildings and plants. Stocks, for example, are not covered by the reinstatement value provision.
Q. How does asset depreciation factor into standard fire insurance?
A. When settling a claim after a fire damages or destroys covered property, the insurance company takes the property's depreciation into account.
Depreciation is a factor taken into account when calculating the damaged or destroyed property's actual cash value (ACV). ACV stands for the property's value at the time of the loss, accounting for the asset's purchase price, usable life, and any necessary depreciation.
