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Difficulty: Very hardInsurance: Principles and Types

Binta Logistics Ltd insured its commercial cold-storage facility, valued at N120,000,000\text{N}120,000,000, against fire risk with two separate insurers: Underwriter Zenith for N45,000,000\text{N}45,000,000 and Underwriter Apex for N35,000,000\text{N}35,000,000. Both policies strictly enforce the Average Clause. Following an accidental fire outbreak, the assessed physical damage to the facility amounts to N36,000,000\text{N}36,000,000. What is the exact amount of compensation (in Naira) payable by Underwriter Zenith to Binta Logistics Ltd?

Answer: 13500000 Naira

Answer

Underwriter Zenith is liable to pay exactly N13,500,000 in compensation.
Under the Average Clause principle in insurance, if an asset is insured for less than its actual value (under-insurance), the insured is considered their own insurer for the uninsured proportion. Therefore, in the event of partial loss, compensation from any given policy is calculated as (Sum Insured under that policy / Total Actual Value of Property) * Assessed Loss. Applying this gives (N45,000,000 / N120,000,000) * N36,000,000 = N13,500,000.

Step-by-Step Solution

1
Determine the insured's total property value, individual underwriter cover, and actual loss incurred.
Property Value = N120,000,000; Zenith Policy Cover = N45,000,000; Actual Loss = N36,000,000.
Establishing accurate figures is necessary to check for under-insurance.
2
Apply the Average Clause formula to find Underwriter Zenith's rateable proportion of loss.
Liability = (N45,000,000 / N120,000,000) * N36,000,000.
When a property is under-insured and subject to an average clause, each insurer pays only the proportion of loss that their sum insured bears to the total actual value of the property.
3
Perform the mathematical reduction and multiplication.
Liability = 0.375 * N36,000,000 = N13,500,000.
This yields the final exact amount payable by Underwriter Zenith.

Key Concept

Average Clause and Contribution Principles in Fire Insurance
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Topics

Insurance: Principles and Types

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