Page 30 - The Insurance Times February 2026

Average condition generally relates to inadequacy of Sum Answer: Let us check the 75% standard first i.e., 100,000 /
Insured (S.I) and insured paid a lesser premium in relation 120,000 = 83%. Since it is not less than 75%, average will
to the risk he brought. There are different applications of not be applied and the insured will get the full loss -
Average condition. They are: Rs.10,000.
Y Pro-rata condition of Average
Consider another example - Work out the final claim
Y Special Condition of Average
amount to be paid to the insured in relation to the follow-
Y Two Conditions of Average
ing farming product claims: S.I. Rs. 600; Value at risk Rs.
Y 85% Condition of Average (Reinstatement Memoran- 1000; Loss Rs. 300
dum)

Y First Loss Answer: Let us check the 75% standard first i.e., 600 / 1000
= 60%. Since the S.I. is less than 75% of the actual value,
average will be applied. 600 / 1000 * 300 = Rs. 180
Pro-rata condition of Average
Pro-rata condition of Average is applied if the S.I. of a prop- Two Conditions of Average
erty insured, at the time of any loss, be less than the actual
value at risk then the amount of claim will be proportion- In order for this type of average to be applied, there must
ately reduced. The following formula is used: be two policies are to be in force; One of which covering
more specific location and the second covers all locations
S.I. / Actual value at risk * Loss
on floating basis (with one S.I.).

For example: Naveen owns a building valued Rs. 250,000. How it is applied in settling a claim? The second policy (float-
The building suffered a storm damage of Rs. 20,000. How ing) will only be involved if the more specific policy is ex-
much would Naveen get if the building was insured for Rs. hausted.
200,000 and the policy was subject to Rs. 200 Excess?

Let us take an example: Tariq is a merchant having two
Answer: S.I. / Actual value * Loss
fire insurance policies. His 1st policy covers his stock at
200,000 / 250,000 * 20,000 = Rs. 16,000 Abids store for Rs. 40,000 and this policy is subject to pro-
Amount payable 16,000 - 200 = Rs. 15,800/- rata average. His 2nd policy (on floating basis) covers his
stock in Hyderabad and Secunderabad stores for Rs. 40,000.
Consider another example: Mohan owns a building valued This policy is subject to the "Two Conditions of Average"
Rs. 150,000. He insured it for Rs. 100,000. Several months clause.
later his building was totally destroyed in an earthquake.
How much should Mohan get if the policy was subject to an A Fire damage at Abids store caused Rs. 2,000 worth of
excess of Rs 100? damage to the stock. At the time of loss each store had Rs.
50,000 worth of stock. If this is the situation, how is the loss
Answer: This is a classic case of a total loss case. Hence, apportioned between the policies?
average condition will not be applied. Full S.I. would be
payable - i.e., 100,000 - 100 = Rs. 99,900/- Answer: Step 1:
The more specific policy pays first i.e., the policy which cov-
Special Condition of Average ers only Abids store. Average = SI / Value at risk * loss. =
40,000 /50,000 * 2,000 = Rs. 1,600
Special Condition of Average is applied to farming/ agricul-
tural produce and when S.I. is less than 75% of the actual The remaining (2,000-1,600) Rs. 400 goes to the floating
value. The reason for granting the insured this facility is that policy.
there are fluctuations in the prices of farming products.
Step 2: The Floating policy. The formula for the two condi-
For Example - a farm produce was insured for Rs.100,000. tions of average is:
It suffered a loss of Rs.10,000 due to fire. The actual value
of the commodity at the time of loss was Rs.120,000. How SI (of floating Policy) / Net Actual Value Protected * Remain-
much should the insured get? der amount of loss

The Insurance Times February 2026 27