Insured Your Shop for ₹20 Lakhs? Why You Might Get Only ₹10 Lakhs After a Fire

🔥 The Half-Payout Nightmare

It is 2026. Mr. Sharma owns a thriving garment shop. Due to inflation and business growth, his total stock is now worth ₹50 Lakhs.

To save on premiums, he renews his old Fire Insurance policy which only covers ₹25 Lakhs. He reasons, "It is unlikely the entire shop will burn down. If a small fire happens, ₹25 Lakhs is enough coverage."

Disaster strikes. A short circuit causes a fire, destroying stock worth ₹10 Lakhs. Mr. Sharma confidently claims ₹10 Lakhs. The surveyor arrives, calculates the inventory, and hands him a settlement for only ₹5 Lakhs. Why? Because of the "Average Clause." Since he was 50% underinsured, the insurance company is legally liable to pay only 50% of his claim.

This is the most misunderstood concept in property insurance. Insurance is not a lottery ticket where you pick a random number. It is a contract of "Indemnity" based on the Full Actual Value of the asset.

If you insure your property for less than its actual value (Underinsurance), the insurer assumes you have decided to be your own insurer for the uninsured portion. Therefore, you must bear a proportional share of every loss, no matter how small. 

Insured Your Shop for ₹20 Lakhs?

The Brutal Formula

🧮 Claim Payout Calculation

(Sum Insured ÷ Actual Value) × Loss Amount = Payout

• Actual Value of Stock: ₹50 Lakhs
• Sum Insured (Policy Value): ₹25 Lakhs
• Ratio: 50% (You are half-insured)
• Fire Loss: ₹10 Lakhs
• Payout: 50% of ₹10 Lakhs = ₹5 Lakhs

Result: Mr. Sharma lost ₹5 Lakhs from his own pocket to save perhaps ₹2,000 on the annual premium.

Reinstatement Value vs. Market Value (For Buildings)

For stocks, the value is simple (Cost Price). But for Buildings (your house or factory), it gets tricky, especially with rising construction costs in 2026.

Market Value Basis (Depreciated)	Reinstatement Value Basis (RIV)
Pays the value of the building minus depreciation (age).	Pays the cost to construct a brand new building today.
Result: You get cash, but it's not enough to rebuild.	Result: You get enough funds to rebuild a new shop/house.
Average Clause applies on Depreciated Value.	Average Clause applies on Current Construction Cost.

Recommendation: Always choose the Reinstatement Value (RIV) clause for fixed assets. Inflation makes construction costlier every year. If you insured your factory 10 years ago for ₹1 Crore, and today it costs ₹2 Crores to build, you are massively underinsured.

The "Agreed Bank Clause" Myth

"But the bank decided the insurance amount!"

Banks generally only care about protecting their Loan Amount. If your stock is worth ₹50 Lakhs but the loan outstanding is ₹20 Lakhs, the bank might only insure for ₹20 Lakhs. They are protected. YOU are not. You must buy a separate policy or increase the sum insured to cover your full equity.

🛡️ Chief Editor’s Verdict

The Average Clause is not a scam; it is simple arithmetic.

1. Review Annually: Stock prices fluctuate, and construction costs rise. Review your Sum Insured at every renewal, not just copy-paste last year's number.
2. Declaration Policy: If your stock levels fluctuate wildly (e.g., peak Diwali season vs. off-season), opt for a "Floater Declaration Policy." You declare the value monthly, and the premium is adjusted. This ensures full cover without overpaying.

Insure for value, not for premium.

Disclaimer: This article provides general information regarding Insurance principles (Standard Fire and Special Perils Policy) in India, current as of January 2026. It does not constitute professional advice. Insurance is the subject matter of solicitation. Policy terms, exclusions (like Average Clause), and claim procedures vary by insurer. Please consult a registered insurance advisor or broker to assess your risk correctly.