Fire & business cover
Setting the right sum insured for business fire cover: reinstatement vs market value
The sum insured is the single number that decides what your fire policy pays. Choosing the basis behind it — reinstatement or market value — and keeping it current is what separates a claim that rebuilds the business from one that falls short.
The sum insured looks like a formality on the proposal form. It is the most consequential number in the policy: set the basis wrong, or let it fall behind, and a fire claim is cut before anyone argues a single line item. It is one of the first choices we walk through in fire insurance for business.
The short version
- Reinstatement value rebuilds as new; market value pays the depreciated worth.
- For assets you must restore to keep operating, reinstatement is the basis that funds recovery.
- Below about 85% of reinstatement value, the average clause cuts claims.
- Set the number from current replacement cost, then review it every year.
Reinstatement vs market value — which one pays you back fully
Reinstatement value insures the cost to rebuild or replace your property as new, with no deduction for depreciation; market value pays the depreciated worth. For a working factory or building you cannot afford to lose, reinstatement is the basis that actually funds recovery — market value leaves an age-and-wear gap you fund yourself.
| Question | Reinstatement value | Market value |
|---|---|---|
| What it pays | Cost to rebuild / replace as new | Depreciated, current worth |
| Depreciation deducted? | No | Yes |
| Best for | Buildings, plant & machinery, fixed assets you must restore | Old assets near end of life you would not replace like-for-like |
| Condition | You must actually reinstate, usually within 12 months | None |
| Premium | Higher | Lower |
A reinstatement claim is typically settled on market value first, with the balance released once you rebuild and prove the cost.
The 85% rule, and how basis feeds the average clause
Basis and adequacy work together. Indian fire and property cover commonly applies the average clause once the sum insured falls below about 85% of the reinstatement value — so even a reinstatement policy is cut at claim time if the declared number is short.
The mechanism — proportionate reduction for under-insurance — is the subject of the hub: the average clause explained.
How to arrive at the number
Start from a current replacement cost — not the original purchase price, and not the book value in your accounts.
For buildings, that means current construction rates; for plant and machinery, current landed replacement cost. A formal valuation matters most for high-value industrial risk, where insurers increasingly expect a professional valuer's report. Replacement costs have moved sharply in recent years — one reason a number set even three or four years ago is often already short.
Why the right number drifts every year
Assets are added, prices rise, and the sum insured stays where it was — so adequacy decays quietly between renewals.
Two safeguards help: an escalation clause that lifts the sum insured steadily through the policy year, and a fixed annual review against an up-to-date asset register. The point is not to over-insure; you cannot recover more than the asset is worth. It is to track reality so the average clause never has a reason to apply. The same accurate number is also a lever on what you pay.
Frequently asked questions
Is reinstatement value always better than market value?
For assets you would have to rebuild or replace to keep operating, yes — it funds recovery without a depreciation gap. For old assets near the end of their life that you would not replace like-for-like, market value can be the sensible, lower-premium choice.
What is the 85% rule?
Many policies waive the average clause as long as the sum insured is at least about 85% of reinstatement value. Below that, claims are reduced proportionately.
Does reinstatement value apply to stock?
Reinstatement value generally applies to fixed assets — buildings, plant, machinery, fixtures. Stock is usually insured on a different basis, such as a declaration policy that tracks changing values.
General information on valuation bases, not advice on a specific policy or insurer. The 85% under-insurance threshold and IRDAI valuation references to be cleared by counsel.
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A note on this page. Everything here is general information, not insurance, legal, financial or tax advice, and nothing is an offer. For advice about your situation, talk to us.