Sum Insured

The sum insured is one of the most critical elements of any commercial insurance policy in India. It appears in the policy schedule and sets the ceiling on the insurer's obligation. Regardless of the actual loss suffered, the insurer's payout cannot exceed the sum insured. Selecting an appropriate sum insured is therefore a fundamental responsibility of the insured, typically guided by their IRDAI-licensed insurance broker.

In Indian property insurance — including the standard fire and special perils policy — the sum insured should reflect the total value of the assets being covered. This may be calculated on an indemnity basis (market value with depreciation) or on a reinstatement basis (new replacement cost without depreciation), depending on the policy terms. For stock and inventory, the sum insured should represent the maximum value of stock likely to be at risk at any point during the policy period, including raw materials, work-in-progress, and finished goods. For buildings and machinery, the sum insured should reflect either depreciated value or reinstatement cost, as applicable.

Under-insurance is a significant risk for Indian businesses. If the sum insured is less than the actual value of the property, the average clause (also known as the condition of average) applies. This clause reduces the claim payout in the same proportion as the under-insurance. For example, if a factory's assets are worth INR 10 crore but the sum insured is only INR 5 crore (50% under-insurance), a claim of INR 2 crore will be settled at only INR 1 crore. The average clause is standard in Indian fire and property policies and is strictly applied by IRDAI-licensed surveyors.

Over-insurance — declaring a sum insured higher than the actual asset value — does not benefit the insured. Under the principle of indemnity, the insurer pays only the actual loss, never more. Over-insurance merely results in unnecessarily higher premiums.

For Indian businesses with fluctuating asset values, such as those with seasonal inventory or commodity-linked stock, IRDAI guidelines permit declaration-based policies. Under this arrangement, the insured declares the value of stock at regular intervals (monthly or quarterly), and the premium is adjusted based on the average declared value. This mechanism helps businesses avoid both under-insurance and over-insurance for their inventory. In liability insurance, the sum insured is referred to as the limit of indemnity and represents the maximum the insurer will pay for all claims during the policy period.