Condition of Average in Fire Insurance
Insure 75% of the value and you are paid 75% of every loss.
If property worth ₹1 crore is insured for ₹60 lakh, the owner has paid premium on 60% of the risk. The condition of average makes the owner carry the other 40% of every loss. A typical SFSP wording puts it plainly: if the property is worth more than the sum insured when the loss starts, "the Insured shall be considered as being his own insurer for the difference and shall bear a rateable proportion of the loss accordingly".
Average is how indemnity (an IC-01 principle) is kept fair between policyholders: without it, everyone would insure for a fraction of value, pay a fraction of the premium, and still expect partial losses paid in full. IRDAI's 2024 master circular defines underinsurance as the part of a loss the policyholder bears when the sum insured is below the actual value of the asset, and requires every retail policy to state whether average applies and how much underinsurance is waived.
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Worked Example: A Textile Godown in Surat
Claim = loss × (sum insured ÷ value at risk on the day of loss).
- 1
Find the value at risk
On the day of the fire the godown holds grey cloth worth ₹2 crore.
- 2
Compare with the sum insured
The stock is insured for ₹1.5 crore. Ratio: 1.5 ÷ 2 = 0.75. The trader is 25% underinsured.
- 3
Assess the loss
The surveyor assesses damaged stock at ₹40 lakh.
- 4
Apply average
₹40 lakh × 0.75 = ₹30 lakh. The trader bears ₹10 lakh.
- 5
Then deduct the excess
Any policy excess comes off the averaged figure, not the gross loss. The claim can never exceed the sum insured.
Where Average Applies, Is Softened or Is Absent
| Policy or basis | How average works |
|---|---|
| SFSP (indemnity) | Pro-rata average on every loss, and each item (building, plant, stock) is tested separately |
| Bharat Sookshma and Laghu Udyam Suraksha | Underinsurance waived up to 15%: if the sum insured is at least 85% of value, the claim is paid without average; below that, proportionate reduction |
| Bharat Griha Raksha | Underinsurance does not apply at all |
| Agreed value | No average: the agreed amount is paid without adjustment |
| Declaration policy for stocks | If the last declaration before a loss was too low, the claim is cut in the ratio of declared to true value |
| Several policies tied to a lender | No contribution between insurers; underinsurance is tested on the combined sum insured against value at risk |
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Item by Item, Not Policy by Policy
A Pune engineering unit insures its building for ₹3 crore (worth ₹3 crore) and its plant for ₹2 crore (worth ₹4 crore). A fire damages plant worth ₹1 crore. Average applies to the plant item alone: ₹1 crore × 2/4 = ₹50 lakh. The fact that the building is fully insured does not help, because spare cover on one item cannot be borrowed by another. A floater cover for stocks at several locations is the exception that lets one sum insured float across locations.
The commonest cause of average is not deliberate underinsurance but inflation and growth: a sum insured fixed three years ago, or a plant expansion never added to the policy. That is why the Bharat products build in cover for additions during the year and why Griha Raksha escalates the building sum insured automatically.
How IC-11 Tests This
Almost always a calculation: sum insured, value at risk and loss given, find the claim. Read which value the question gives: average uses the value at the time of loss, not at inception. The traps are applying average across items instead of item by item, deducting the excess before averaging, and applying average to an agreed value or Griha Raksha policy.
FAQs
What is the condition of average in fire insurance?expand_more
A policy condition that reduces a claim in proportion to underinsurance. If property is worth more than its sum insured at the time of loss, the insured bears a rateable share of the loss as his own insurer for the shortfall.
How is average calculated in an insurance claim?expand_more
Claim = loss × sum insured ÷ value at risk at the time of loss. Insure ₹75 lakh of stock worth ₹1 crore, suffer a ₹20 lakh loss, and the claim is ₹15 lakh.
Does average apply to a total loss?expand_more
In effect the cap does the work: on a total loss of underinsured property the claim is limited to the sum insured, which is the same result the formula gives.
Is there any fire policy without the average clause?expand_more
Yes. Bharat Griha Raksha does not apply underinsurance, and agreed value covers pay the agreed amount without average. The Bharat Sookshma and Laghu products waive underinsurance up to 15%.
Next steps
- Reinstatement Valuearrow_forward
- Bharat Productsarrow_forward
- Deductiblesarrow_forward
- Principle of indemnity (IC-01)arrow_forward
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