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Difficulty: MediumInsurance: Principles and Types

Chief Kalu insured his commercial supermarket building, valued at N50,000,000\text{N}50,000,000, against fire for a sum of N35,000,000\text{N}35,000,000. The policy contains an average clause. If a fire outbreak damages the building causing a loss of N10,000,000\text{N}10,000,000, what amount in Naira will the insurance company pay as indemnity?

Answer: 7000000 Naira

Answer

7,000,000 Naira
Under the average clause in fire insurance policies, if a property is under-insured (insured for less than its true value), the insured is deemed to be their own insurer for the uninsured portion. Here, the building was insured for 70% of its full value (N35,000,000 / N50,000,000 = 0.70). Therefore, the insurance company pays only 70% of the actual loss incurred (70% of N10,000,000 = 7,000,000 Naira).

Step-by-Step Solution

1
Identify the property values given in the problem statement.
Actual Value = N50,000,000; Sum Insured = N35,000,000; Actual Loss = N10,000,000.
These figures are required to calculate indemnity under under-insurance.
2
Apply the average clause compensation formula.
Compensation = (Sum Insured / Actual Value) * Actual Loss
When property is insured for less than its full value and has an average clause, the insurer pays only a proportionate share of any loss.
3
Calculate the compensation payable.
Compensation = (35,000,000 / 50,000,000) * 10,000,000 = 7,000,000 Naira.
Since the owner insured 70% of the building's value, the insurer pays 70% of the actual loss suffered.

Key Concept

Average Clause in Insurance
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Topics

Insurance: Principles and Types

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