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Archive for August, 2020

Quick Guide To Basis Of Sum Insured And Claim Settlement

Posted on: August 29th, 2020 by hema kashyap No Comments

Cambridge Dictionary defines Sum Insured as “a maximum amount that an insurance company will pay to someone who makes a claim”.
This definition is at the heart of many on-going conflicts and debates in the Insurance world. As simple as it sounds from an Insurer’s perspective, it is an enigma for most buyers of insurance products. Buyers’ confusion is often compounded by ‘newer bitter discoveries’ at the point of truth; Claims. The objective of this primer is to be a simple ready reckoner of popular insurance policies for both, insurance professionals selling commercial lines products and buyers.

Some commonly used terms in context of sum insured are:

Market Value / Depreciated Value: Market value is the value of an asset as currently priced in the marketplace i.e. at which it can be sold or bought on ‘as it is’ basis. It would closely represent the present-day new cost of similar item / structure less the depreciation due to age / usage. This is, in most cases, different from the accounting Book value or the Original Purchase price.

Reinstatement Value: It represents the current ‘new for old’ replacement value of the asset. It represents the price of a new same or similar asset. Often it is included by incorporating “Reinstatement Value Clause” in the policy.

Average Clause / Under-Insurance: if the sum insured of a property at the time of loss or damage is less than its Market Value or Reinstatement Value (as per the policy conditions ), claim payment by the insurance company will be reduced in the same proportion.


1. Standard Fire & Special Perils (SFSP)


2. Burglary & Theft


Option I

Reinstatement Value (RV) for all fixed assets and Market value (MV) for stocks. Reinstatement Value clause to be specifically mentioned.

Option II

Market value for all fixed assets and stocks. In the absence of Reinstatement Value specifically, policy is default treated as on Market value.

Option I

Claim settlement on RV basis for all fixed assets after actual reinstatement of assets and MV for stocks. Insured can opt to take MV settlement for fixed assets with no reinstatement.

Option II

Claim settlement on Market Value for all fixed assets and stocks.


3. Industrial All Risk / Asset All Risk / Property All Risk


Reinstatement Value (RV) for all fixed assets and Market value (MV) for stocks. (Some Insurers may agree for MV only for very old fixed assets, in which case, the claim settlement will also be on MV basis). Claim settlement on RV basis for all fixed assets after actual reinstatement of assets within 12 months (or an extended period, if allowed by the Insurer) and MV for stocks. Insured’s option to seek MV settlement for fixed assets with no reinstatement.
For all policies above, average clause applies in all claim situations. Upto 15% Under-Insurance relaxation, under material damage section, can be mutually agreed in IAR / AAR / PAR policies.

4. Marine Cargo / Transit


Predetermined valuation arrived at and hence these policies are on ‘Agreed Value’ basis between the Insurer and Insured. Claim settlement on Agreed

5. Boiler and Pressure Plant CPM Electronic Equipment Machinery Insurance


Reinstatement Value (RV) for all such equipment. (Some Insurers may agree for MV only for very old fixed assets / 2nd hand machines, in which case, the claim settlement will also be on MV basis). Partial loss settlement on RV basis with no depreciation except limited life items. Total loss settlement on MV basis. Partial loss MV settlement with no reinstatement exists. Average clause applicable.

6. Project Insurance


Completely erected value of the project including design fees, supplies, erection costs, freight, all taxes and duties. Any used equipment / machinery can be covered on MV basis or Refurbishment valuation report basis. Loss settlement on Reinstatement Value basis. For Used equipment / machinery on MV or Agreed Value Average clause is applicable.

7. Business Interruption (Fire / Machinery)


Advance Loss of Profit –

Annual Gross Profit and multiple of the same if the Indemnity period is more than 12 months. For Gross Profit, please refer to the specific definitions under the policy wording. Limited Premium refund provision exists. Loss settlement on reduction in Gross Profit during the interruption period corresponding to the Indemnity period. Average clause is applicable. As the sum insured is adjustable based on actual, a buffer is always advisable.

8. Liability Policies


(CGL, D & O, PI, Cyber, Crime etc.)

Limit of liability (LOL) to be selected by Insured basis of their own exposure analysis / specific contract values. Any One Accident (AOA) & Any One Year (AOY) basis loss settlement

9. Employee (WC) compensation policy


Sum Insured based Earnings of the covered employees which include wages, salaries, over time, board / lodging, any other perquisites Claim settlement basis the award of judicial authority / body created for labour claims adjudication. Some Insurers’ may apply under insurance on claims if Earnings are understated.


Understanding the average clause/ under-insurance clause:

  • A new machine was purchased in 2010 for INR 10 lakhs. This is the Original Purchase Cost
  • A used 2010 model can be bought for INR 6 lakhs in 2020. This is the Market Value of the machine
  • The same new machine costs INR 20 lakhs in 2020. This then is the Reinstatement Value
  • The machine has been depreciated @ 5% per annum, using Straight Line Depreciation method, in the books of the owner. Thus, the Book Value of the machine is INR 5 lakhs.
  • If the Sum Insured of INR 5 lakhs is taken under the Fire Insurance policy, on Reinstatement Value basis, the insurer will apply 75% under-insurance and pay only 25% of each claim (INR 5 lakhs / INR 20 lakhs)
  • If the Reinstatement Value Clause is not attached to the policy, the claim will be assessed with 16.66% under-insurance (INR 5 lakhs / INR 6 lakhs) after application of depreciation.

This Primer provides advice on broad principles only and is not intended to be an exhaustive review of your potential loss exposures. There may be many areas where further specialist advice is required. In such cases, please feel free to contact us.

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Sunshine is the best medicine

Posted on: August 20th, 2020 by hema kashyap No Comments

The lockdown and WFH has forced us to stay inside our houses for the last 3 months. This has drastically reduced our exposure to sunlight. Ancient Indian texts, Ayurveda and now growing modern research on sunlight suggests that moderate exposure to sunlight is beneficial to both body and mind. It is a known fact that exposure to morning sunlight promotes Vitamin D production in the skin round the year.

Soaking in the sun can have several health benefits and here is why you should spend at least 10 minutes in sunlight every day:

  1. Elevates the mood: Brain releases a hormone called “Serotonin” which helps a person feel calm and focused. Moderate exposure to sunlight boosts the serotonin level which in turn improves the mood.
  2. Increases Vitamin D production: Vitamin D is essential for calcium absorption and bone growth. It is sunlight that activates Vitamin D production in the body.
  3. Improves sleep: “Melatonin” also known as sleep hormone helps in improving sleep, synchronizes body clock and lowers stress and it is sunlight that impacts the production of melatonin.
  4. Heals skin disorders: Sunlight helps in the healing of skin disorders such as acne, psoriasis, eczema, and other fungal skin infections.
  5. Boosts growth in children: Many cultures recognize this that moderate sunlight exposure increase the growth and height of children, especially babies. Studies have shown that sun exposure in first few months has an effect on how tall the person grows.

According to WHO, getting anywhere from 5 to 15 minutes of sunlight on your arms, hands, and face 2-3 times a week is enough to enjoy the vitamin D-boosting benefits of the sun.

But if you’re going to be outside for more than 15 minutes, protect you skin by applying sunscreen and covering yourself.


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Quakes arouses interest in insurance

Posted on: August 12th, 2020 by hema kashyap No Comments

Frequent low-intensity earthquakes are prompting people living in the National Capital Region (NCR) to look for home insurance, according to a survey. According to a report by the National Disaster Management Authority, 59% of India is vulnerable to moderate-to-major earthquakes.

More than 11,000 home owners were surveyed to gain an understanding of people’s attitude towards home insurance. Five out of 10 respondents in Delhi said that earthquakes have made them anxious enough to think about buying home insurance while 35% of the respondents in NCR have home insurance.

Survey findings show however that home insurance is not the first insurance product on most people’s “To Buy” list as 73% of the respondents across India and 57% in Delhi-NCR said that they have so far not considered buying home insurance.

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Seasonal monsoon floods inflict US$20bn economic toll in Asia

Posted on: August 8th, 2020 by hema kashyap No Comments

An active monsoon season prompted more than $20bn in flood-related damage in parts of China, Japan, India and Bangladesh during the month alone. Much of the physical damage to property, infrastructure and agriculture was anticipated to be uninsured – only reinforcing the importance of finding ways to help lower the protection gap across the region.

Furthermore, persistent seasonal rainfall worsened the flood situation across China’s Yangtze River Basin during the month, with the death toll since 1 June rising to at least 175, as extensive flooding affected the hardest-hit provinces of Anhui, Hubei and Chongqing municipality.

The Ministry of Emergency Management (MEM) noted that nearly 500,000 homes had been damaged or destroyed and 5.2m ha of cropland affected. Direct seasonal economic losses were estimated at CNY150bn ($22bn), of which nearly $16bn occurred in July. Most of the losses were anticipated to be uninsured.

Other natural hazard events that occurred in Asia Pacific in July include:

  • Record-breaking rainfall triggered widespread flash flooding and landslides across southern Japan from 3-10 July, killing at least 82 people and injuring 114 others. Flood damage was most severe on Kyushu Island as dozens of prefectures reported varying levels of physical damage impacts to homes, businesses, infrastructure and agriculture. The event prompted a nearly $4bn recovery effort by the federal government.
  • Record-breaking rains, described as a 1-in-500-year event by the Meteorological Service of New Zealand, triggered flash flooding and landslides in northern and western New Zealand on 17-18 July. Thousands of homes and a vast area of agricultural land in Northland were inundated. Local authorities of New Zealand expected a multi-million-dollar level of direct damage and economic loss.

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Optima’s core group has more than 100 man-years of experience in insurance. Our experience has trained us in reading the fine print of insurance policies, understanding it and applying it for the benefit of our clients.

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