Skip to main content

Escalation Clause in Fire Insurance

 


The escalation clause is a clause attached to the standard fire insurance policy to provide additional sum insured, which becomes necessary, while rebuilding or repairing a damaged property.

Suppose a loss occurs to property or equipment due to fire perils, the next step is the reconstruction of building or property/machinery or repairing the same. In doing so the cost incurred would be more than the sum insured under the fire policy due to appreciation in various aspects like cost of new raw material, labour etc. The insured is faced with two aspects that cause financial strain:

·       The overall cost of reconstructing / repairing the property or machinery exceeds the sum insured under the policy

·       Claim amount is reduced due to application of under insurance.

To counter this unexpected situation at the time of loss, the fire policy provides for escalation clause facility to have adequate coverage as well as to avoid being underinsured.

Escalation clause and underinsurance

Under insurance is an insurance concept wherein the market value of the property at the time of loss is compared with the policy sum insured. If the sum insured is less than the total cost of rebuilding or repairing the property then prorata or proportionate sum insured is paid in keeping with the insurance condition: “condition of average”.

Condition of average underlines the underinsurance concept. The clause states:

“If the property hereby insured shall at the time of loss or at the commencement of any destruction of or damage to the property by any other peril hereby insured against be collectively of greater value than the Sum Insured thereon, then the Insured shall be considered as being his own insurer for the difference and shall bear a ratable proportion of the loss accordingly. Every item, if more than one, of the policy shall be separately subject to this condition”

 

 

Important features of the escalation clause

Escalation clause can be opted at the inception of the policy and the percentage of escalation is agreed upon.

Additional premium is paid in advance for the percentage opted. This way the sum insured for the insured property, automatically escalates each day and for any unforeseen loss during the policy period the escalated sum insured is reckoned while assessing the loss amount.

It is a percentage increase or an increase by a predefined amount.

For example, if the escalation clause includes a 10% increase, the coverage amount will increase by 10% each year. This percentage applies up to the date of loss and the sum insured is proportionately increased while computing the claim.

Percentage of escalation depends on mutual agreement between insurer and insured.

Benefits of the escalation clause

The purpose of the escalation clause is to protect policyholders from being underinsured in the event of a major loss when coverage becomes insufficient to fully rebuild or repair the damaged property.

Let us look at an example with figures:

Insured property value: Rs 1,00,000

Escalation opted: 10%

Coverage will increase by: Rs 10,000

The main benefit of an escalation clause is that it can provide additional protection to policyholders in the event of a fire. With the escalation clause, the amount of coverage provided by the insurance policy increases automatically over time. Escalation ensures that the policyholder has adequate coverage to rebuild or repair the property in the event of a fire loss.

Escalation clause is beneficial to the policyholder as it helps beat the inflation costs. As the cost of building materials and labour increases over time, the amount of coverage provided by the insurance policy will also increase. Policyholder has enough coverage to rebuild or repair the property at current market rates.

Escalation clause in a fire insurance policy will depend on the specific needs and circumstances of the policyholder. However, the escalation clause does not apply to stocks.

Escalation clause is designed keeping in view the inflation levels at the time of loss. The cost increase for reconstruction or repairing the property becomes an important factor and creates an additional financial burden on the insured.

With this clause policyholders have adequate coverage to rebuild their property in the event of a fire loss. Escalation clause reduces the financial strain in a project in the aftermath of a loss.

 

 

We at Zen Insurance help you with complete understanding of the various insurance covers offered. Please contact us for assistance.

 

Disclaimer:   

Zen Insurance Brokers is an IRDAI registered broker which facilitates quick & accurate insurance broking services. We deal with only regulator approved products of insurers. We do not underwrite the products.

 

 

 

 

 

 

Comments

Post a Comment

Popular posts from this blog

Prior and Pending Litigation in Professional Indemnity Policy

  The prior and pending litigation exclusion in liability policies is a clause designed to exclude coverage for claims related to legal disputes or circumstances already known, pending, or in progress before the policy's effective date. It’s an important exclusion because it limits the insurer’s liability for events that occurred before the policy began. Here are more details about this exclusion. Purpose of the Prior and Pending Litigation Exclusion Insurers include this exclusion to avoid covering claims or disputes that were known or existed before the policy started. It ensures that the underlying policy , Directors & Officers (DnO), Professional Indemnity (PI) policy, etc., only covers new claims that arise from professional errors, omissions, or negligence occurring during the policy period and not pre-existing or ongoing legal matters. What the Exclusion Covers Prior Litigation : Any lawsuit, claim, investigation, or l...
Post a Comment
Read more

Mitigation Costs in Professional Liability Policies

  Professional Liability Insurance in India, more commonly referred to as Errors & Omissions (E&O) insurance in the case of businesses, provides the business with insurance coverage against claims of negligence, error, or omission in the services rendered by the business under insurance. In this policy, one of the features includes mitigation cost coverage. Mitigation costs are sums of money that an Insured pays to avoid or lessen the possibility of a claim arising. For example, if a business finds an error in its work that may give rise to a potential liability claim, it may incur expenses to correct such error before it generates a claim. These costs will be incurred in trying to reduce the potential damage or liability and, therefore, may be covered under a professional liability insurance policy. However for mitigation cost section claim to trigger there needs to be a claim payable under the policy. Once the claim is determined to be payable under the policy, the miti...
Post a Comment
Read more

Exclusion of insolvency and bankruptcy in D&O policies

Broadly speaking, a D&O insurance policy offers liability cover to companies' directors and officers for claims made by others resulting from decisions and actions made while undertaking their normal duties under the employment contract. The policy includes different types of exclusions; one of them is insolvency and bankruptcy exclusion. The insolvency and bankruptcy exclusion is a provision under a D&O policy that excludes coverage directly or indirectly from the insolvency or bankruptcy of the company. Purpose of the Insolvency and Bankruptcy Exclusion 1. Risk Management: The increased risk associated with a situation involving insolvency or bankruptcy is a consideration noticed by insurers while bringing forth this exclusion. In particular, claims tend to increase at times when a company is undergoing financial trouble and stakeholders are trying to recover their losses. 2. Moral Hazard: The exclusion helps cap moral hazard, whereby directors and officers may take more ...
Post a Comment
Read more