📉 The Mathematics of Half-Coverage
Ramesh owns a large textile wholesale warehouse. During the peak Diwali season, the total value of his stock swells to ₹60 Crores.
He thinks, "A fire won't destroy everything. It will probably only burn one section. I will just insure for ₹30 Crores to save on the premium."
One night, a short circuit causes a fire. Stock worth ₹10 Crores is burnt to ashes.
Ramesh claims ₹10 Crores. He is confident because his policy limit is ₹30 Crores, well above the loss amount.
The surveyor arrives, calculates the total stock value at risk, and hands him a check for only ₹5 Crores. Ramesh is shocked. He lost ₹5 Crores because he tried to save a fraction on premiums. This is the "Condition of Average."
Insurance works on the principle of "Full Value." If you only pay premium for 50% of the risk, the insurance company will only pay 50% of the claim—even if the claim is small.
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| Insured Your Shop for ₹20 Lakhs? |
The Penalty Formula
While IRDAI has waived this clause for small businesses (under the Bharat Sookshma/Laghu Udyam Suraksha policies for sums up to ₹50 Cr), Large Risks and Floating/Declaration Policies still strictly enforce this trap.
🧮 How Your Claim is Calculated
Claim Payout = (Sum Insured ÷ Actual Total Value) × Loss
- Sum Insured (Ramesh's Policy): ₹30 Crores
- Actual Value (Total Stock): ₹60 Crores
- Ratio: 30 ÷ 60 = 50% (He is 50% under-insured).
- Actual Loss: ₹10 Crores
- Payout: 50% of ₹10 Crores = ₹5 Crores.
The "Stock Fluctuation" Solution
"But my stock value changes every month! How can I predict it?"
For businesses with fluctuating inventory (like Saree showrooms during wedding season), do not buy a fixed policy. Buy a "Floater Declaration Policy."
You take a high Sum Insured (e.g., ₹2 Crore) to be safe, but you declare your actual stock value monthly. The premium is adjusted at the end of the year based on the average declaration. This minimizes the risk of the under-insurance penalty.
🛡️ Chief Editor’s Verdict
Don't lie to your insurer, and don't be lazy with valuations.
- Know Your Policy: If your Sum Insured is under ₹5 Crores, ensure you are on the Bharat Sookshma Udyam Suraksha policy, which automatically waives under-insurance penalties. If you are on an old "Standard Fire" policy, migrate immediately.
- Reinstatement Value: For machinery and furniture, always insure for "Reinstatement Value" (New Replacement Cost), not "Market Value" (Depreciated Cost). Otherwise, depreciation will eat into your claim even if you are fully insured.
Full cover means full peace of mind.
The information provided in this article is for general educational purposes only. Insurance policies in India are subject to IRDAI regulations and specific policy wordings. The "Condition of Average" rules vary significantly between Bharat Sookshma Udyam Suraksha (Small Business), Laghu Udyam (Medium Business), and standard commercial policies. Always consult a licensed Insurance Broker or Agent to review your specific risk coverage.
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