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.