Case Study: Impact of Underinsurance on Fire Claim Settlement

Background:
In December 2021, one of our apartment clients reported a fire accident that occurred in the basement electrical board room. The estimated loss was approximately ₹75 lakhs. The apartment was insured under a Fire Insurance Policy with a sum insured of ₹100 crores.

Incident Summary:
Following the incident, a survey was conducted by the insurer to assess the damage. Based on the surveyor’s report, the insurer issued a settlement offer of ₹32 lakhs, which came as a surprise to the apartment association, as they had expected a settlement exceeding ₹60 lakhs.

Reason for Reduced Settlement:
The insurer clarified that although the apartment was insured for ₹100 crores, the actual reconstruction value of the property was ₹200 crores at the time of the claim.
This meant the property was underinsured by 50%, triggering the “Average Clause” in the policy — a standard condition in fire insurance.
As a result, only 50% of the assessed loss was payable, leading to a settlement of ₹32 lakhs instead of the full ₹60+ lakhs expected.

Key Learning:
Many apartment associations continue renewing their fire insurance based on outdated property values — often those fixed 8–10 years earlier — without factoring in inflation or appreciation in construction costs. In some cases, values are deliberately reduced to lower premium costs.

However, this practice leads to underinsurance, which significantly reduces claim payouts during loss situations.

Conclusion:
It is crucial to review and update the sum insured annually to reflect the current reinstatement (reconstruction) value of the property.
Proper valuation ensures adequate protection, prevents disputes during claim settlement, and helps associations recover their losses fully and fairly.