Loss Assessment: Average, Salvage and Depreciation
One fire, two items, four adjustments. Work it through once and the S-01 numericals stop being scary.
Once a claim is admissible, the surveyor has to put a number on it. S-01 chapter 13, Loss Evaluation, Assessment and Adjustment, is about doing that the same way every time: start from the gross loss, then apply depreciation, salvage, under-insurance and excess in a sensible order.
Each of these is a named surveyor duty. The regulations ask you to measure the quantum of loss, recommend the percentage and amount of depreciation, comment on salvage and its disposal, and comment on franchise, excess and under-insurance.
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The Four Adjustments
- Depreciation
- A deduction for age, wear and use, so the insured is put back where they were, not in a better position. On a market value basis, the repair or replacement cost is reduced by depreciation.
- Salvage
- What the damaged property is still worth. If the insured keeps it, its value is deducted from the loss. If the insurer pays the full loss, the salvage belongs to the insurer to sell.
- Under-insurance (average)
- When the sum insured is less than the value of the property at the time of loss, the insured bears a share of every loss. Claim = net loss × sum insured ÷ value at risk.
- Excess
- The first part of each loss that the insured bears, as stated in the policy. It comes off last.
The Order of Working
- 1
Measure the gross loss
Cost of repair, or value of the goods destroyed, at the time and place of loss.
- 2
Deduct depreciation
Where the policy is on a market value basis. Not where the policy pays reinstatement value and the property is actually reinstated.
- 3
Deduct salvage
If the insured keeps the damaged goods or material.
- 4
Apply average
Compare the sum insured with the value at risk on the date of loss, item by item.
- 5
Deduct the excess
Once per claim, as the policy states.
- 6
Check the limit
The answer cannot exceed the sum insured for that item.
Worked Fire Claim: A Cloth Merchant's Shop
Illustrative figures. Fire policy on a market value basis, two items: building and stock. Excess taken as ₹10,000 for the example.
Sum insured
Building
₹50,00,000
Stock
₹30,00,000
Value at risk on the date of fire
Building
₹50,00,000
Stock
₹40,00,000
Gross loss
Building
Repairs ₹8,00,000
Stock
Stock destroyed ₹12,00,000 (at cost)
Depreciation
Building
20% on repairs: less ₹1,60,000
Stock
Not applied: stock valued at cost
Salvage kept by insured
Building
Nil
Stock
Damaged cloth sold for ₹2,00,000: less ₹2,00,000
Net loss
Building
₹6,40,000
Stock
₹10,00,000
Average
Building
Fully insured (50 ÷ 50): no cut
Stock
Under-insured (30 ÷ 40 = 75%): ₹10,00,000 × 75% = ₹7,50,000
Claim before excess
Building
₹6,40,000
Stock
₹7,50,000
| Step | Building | Stock |
|---|---|---|
| Sum insured | ₹50,00,000 | ₹30,00,000 |
| Value at risk on the date of fire | ₹50,00,000 | ₹40,00,000 |
| Gross loss | Repairs ₹8,00,000 | Stock destroyed ₹12,00,000 (at cost) |
| Depreciation | 20% on repairs: less ₹1,60,000 | Not applied: stock valued at cost |
| Salvage kept by insured | Nil | Damaged cloth sold for ₹2,00,000: less ₹2,00,000 |
| Net loss | ₹6,40,000 | ₹10,00,000 |
| Average | Fully insured (50 ÷ 50): no cut | Under-insured (30 ÷ 40 = 75%): ₹10,00,000 × 75% = ₹7,50,000 |
| Claim before excess | ₹6,40,000 | ₹7,50,000 |
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Putting It Together
Building ₹6,40,000 plus stock ₹7,50,000 gives ₹13,90,000. Less the ₹10,000 excess, the assessed liability is ₹13,80,000. The merchant bears ₹2,50,000 of the stock loss because stock worth ₹40 lakh was insured for only ₹30 lakh.
Notice that average is applied to the stock item alone. The building was fully insured, so its claim is not cut. That is why the value at risk is worked out item by item, never for the whole shop at once.
Two Mistakes That Cost Marks
First, applying average before deducting salvage: ₹12,00,000 × 75% = ₹9,00,000, less ₹2,00,000 salvage = ₹7,00,000, which under-pays the stock claim by ₹50,000. Second, using the sum insured at policy inception as the value at risk. Average compares the sum insured with the value on the date of the loss.
How S-01 Tests This
Expect one-step numericals: given sum insured, value at risk and loss, find the claim. Check whether the question gives salvage or depreciation and whether it asks for the claim before or after excess. Where the sum insured is equal to or more than the value at risk, average does not apply.
Conceptual questions ask why: depreciation and salvage keep the insured from profiting, and average keeps premium fair between those who insure fully and those who do not.
FAQs
How is the average clause calculated?expand_more
Claim = net loss × sum insured ÷ value of the property at the time of loss. If ₹30 lakh insures stock worth ₹40 lakh, a ₹10 lakh loss is paid at ₹7.5 lakh.
Is salvage deducted before or after average?expand_more
Before. Salvage reduces the actual loss, and average is then applied to that net loss.
Who decides the depreciation rate on a claim?expand_more
The surveyor recommends whether depreciation applies, its percentage and its amount, under the policy terms. The insurer decides the claim.
What happens to salvage if the insurer pays the full loss?expand_more
It belongs to the insurer, which can sell it. The surveyor comments on the salvage and how it should be disposed of.
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