Submitted to: Sri N.

Chandra Mohan NALSAR University of Law Institute of Insurance & Risk Management Submitted By: Sohini Chattopadhyay Roll No. FS11-016 2 nd semester Masters in Law Of Financial Services And Capital Markets

 Sum to be insured under an Insurance Policy bears a critical role in the entire process of covering a risk adequately. and in the second category fall all liability coverage’s.  The sum insured under an insurance policy serves three purposes: 1) It is the amount on which premium is charged 2) It is the maximum liability of the insurer within the policy 3) It is basis for the calculation of under insurance in the event of claim . fire. Insurance provide protection and physical assets are insured for one of the following two reasons. motor. etc.g. 1) The replacement of asset or income or both lost through the occurrence of specified contingencies 2) Relief from legal liabilities incurred through the occurrence of specified contingencies  In the first category falls all property insurance e. marine.

The various methods used for valuation are as under:  1) Valuation based on replacement cost basis: Here the cost of a new machine of similar nature. merger and acquisition. balance sheet. The assets are valued for different purposes e. . There are various methods of valuation. They are also valued for the purpose of insurance. etc.  2) Good as new: There are situation where machine / plant is working satisfactorily because of good maintenance. In such situation. make and capacity if available is found out. this valuation method is used which represents the original actual cost less depreciation but adding back the maintenance cost. This cost will represent the value on replacement cost basis. for taxes. Choice of appropriate valuation method depends upon the purpose of valuation as also on the nature of assets involved.g. Let’s briefly examine the various methods employed for valuation purpose and then examine the current practices being followed in respect of valuation of assets for the purpose of insurance.

g. This method of valuation is applicable to assets that can be currently exchanged in the market for value e. The loss in such situation is not limited to that part only.  4) Fair value method: This represents the value in exchange. its value in the market for sale in exchange for cash is the fair value. . 3) Sum of part valuation: This method of valuation is used where the equipment is not of composite nature. the entire assembly becomes scrap. whatever may be the cost of production of LPG. But this method has the inherent risk of technological process in that if one part is damaged but not available. In this method all the different units / component are valued separately and then added up to arrive at the composite value.

. Book Value: This represents the written down value of the assets in the books of accounts. 5) Depreciation method: a. Over a period of time. this represents the actual cost of the asset and with each passing year appropriate depreciation is charged and the value of the asset is accordingly reduced. the asset value become so low that it will not reflect the true worth of asset. b. In this first year. Market Value: In this method depreciation is allowed on current replacement value of the asset for the number of years it has been in use to arrive at market value.

Indemnity is related to the value of the asset and takes into account the age. the building owner. It might be described as "New for Old". It reflects the cost of replacing the building irrespective of its age. The purpose of insurance is to protect the building owner against the      unwanted and the unexpected. Reinstatement is the method normally applied to houses and flats and blocks of flats. the insured. It makes deduction for wear and tear. size or suitability. should be put back in a position comparable to that before the loss occurred. . using modern techniques. to a standard equal to the existing property and in accordance with current Building Regulations and other statutory requirements. state of repair and suitability for use of the property. Reinstatement cost has been defined as: The cost of demolishing and clearing away the existing structure and rebuilding it to the existing design in modern materials. The principle .if a loss occurs.

The insurers would be failing in their professional duty towards their client if they do not educate and inform them on this account. There cannot be “fit‐all” approach for all eventualities and situation.  Adequacy of sum insured has serious implication for the insured. Review should include assessment of the assets current condition. Inflationary trend should be kept in mind while adjusting sum insured.  Special situation will require specific special approach. This is an exercise which should form part of the risk management approach of the organizations. . required maintenance and estimated remaining useful life. It is desirable that organization have a prograame to revalue assets every five years and review those at every renewal.

let’s divide     assets into the following groups: 1) Building. 2) Plant & machinery 3) Stocks This division is useful because each group has its own peculiarities & characteristics and hence need a separate treatment for valuation purpose. furniture. For the purpose of valuation of assets for fixing sum insured’s. etc. . fixture.

The level of plinth is normally considered as the floor level of lowest occupied floor in case of underground constructions and if there are no underground constructions then the level of floor of the Ground Floor building is considered as the plinth. The plinth and foundation normally do not get damaged but in the event of a serious fire. they can be so affected as to require re-doing. The present day value of plinth and foundations is substantial and therefore if the intention is to insure its value. . it is suggested to specify in the policy. For insurance of building – For insurance of buildings one has to take into account various factors and ensure that the value of the land is excluded since the land cannot be damaged by fire or allied perils.

Stocks may be of . For brand new plant and machinery for its first year of insurance. But this cost may require up‐word revision at the time of renewal of the very first insurance. Plant & machinery: working out the sum insured for plant and machinery         especially old one pose serious problems.Raw material . Stock in process is valued at – the maximum value of stock in process ‐ the cost of raw materials. other inputs and processing cost at any given time. Finished goods – Net manufacturing cost including factory overheads.Finished goods Raw materials are valued at net cost of acquisition at which the raw material is available to the insured.Stock in process . Stocks: Valuations of stock for insurance do not pose much difficulty. the original capital cost may be adequate. .

 Fire Insurance covers property damage caused by sudden and unexpected fire. a sprinkler leakage. such as the disappearance or breakage of the insured property. as well as additional damage caused in relation to these exceptional circumstances.  In addition to the above. Fire insurance is a specialized form of insurance beyond property insurance. robbery or theft through burglary. a stroke of lightning or of the downing of an aircraft. . smoke. soot. Extensive Fire Insurance covers property damage caused by sudden and unexpected leakage. an explosion. and is designed to cover the cost of replacement. natural forces. reconstruction or repair beyond what is covered by the property insurance policy.

c)cooperate with surveyors by providing all the necessary documents for assessment of loss and establishing liability. . As and when a claim occurs. b) give an account of all properties damaged or destroyed with estimated amounts having regard to their values as on the date and place of loss. e)inform particulars of all other insurances existing on the property at the time of loss. sorting. d)cooperate with the insurer in all their activities of entering the premises. their examining. removing or selling to your account. insurance brokers advise to: a) Intimate such loss / damage immediately so that a Competent Surveyor may be deputed to minimize the loss. taking possession of properties. without prejudice.

. Drug Inspector's Report on destruction of Drugs/ Pharmaceutical items (for claim on pharma products only). Report of the Internal Committee constituted for the purpose of investigating the cause of fire. Claim Form. Past claims experience. Fire Brigade Report. Photographs. First Information Report / Letter of intimation to the Police Station duly endorsed / Police Panchnama. Certified True copy of the policy along with schedule and          Endorsements/clauses. if any. Forensic Laboratory Report on samples collected at affected site. Newspaper reports on the incident.

 Final Investigation Report.  Action taken on the suggestion of TAC/ LPA on loss minimisation of prevention.  Meteorological Report  Factory Inspector's Report or Report of Director of Industrial Safety and Welfare. .

therefore.  Fire damage insurance is a critical component of any homeowner’s insurance policy.  Fire insurance policies are generally sold on either market value (indemnity) basis or reinstatement value basis. it only wants the sum insured figure to be declared by the insured. Depending on the scope of insurance policy and the extent of the fire damage. It can include things such as replacement funds for any items directly damaged by heat. the policy may entitle one to a reimbursement of all funds necessary to rebuild one’s home. From the above. In any case. Coverage for fire damage insurance can vary wildly from company to company and even state to state. the onus of proof lies with the insured in the event of the claims. As far as insurance company is concerned. has serious implication for the insured. or smoke. flame. . it is clear that asset valuation for the purpose of insurance is a complicated and tricky affair. or can expand to damage like secondary water damage from the water leftover from efforts to extinguish the fire. Inadequate sum insured.

This can sometimes cause trouble. repairs can begin. which can then be taken to insurance company to see if it is an agreeable sum. as one must prevent secondary water damage within 24 hours. which the fire department’s inspectors usually determine. Professional restoration companies can address the damage and give a repair quote. however. After the insurance company has agreed to pay out that amount. can also play a major role in the amount you receive from your insurance provider.  The cause of the fire. .

and the cause of the fire. so consult your insurance provider for the best plan to suit your home’s needs. each area has its own risks and specialized insurance plans. More comprehensive fire damage insurance plans offer more coverage but cost more. since it depends on your location. what provider you have. . the extent of the fire damage. Generally. Fire damage insurance is a term that has many variables. due to environmental or other factors.