Should insurance amount be equal to Loan amount?

This question comes from industrial sheds/ factory owners & Other Business when their bank asks them to provide an insurance Policy of the property including building & machinery.

For, Eg. If the total value of a property is Rs.6 crore: Rs. 2 crore building, Rs. 2 crore machinery & Rs. 2 crore stock; and if the loan taken by client is 4 crores.

Client’s dilemma is that bank is insisting on insurance coverage of Rs. 4 crore value, whereas the total value on books of the client is Rs. 6 crores.

Client will save substantial cost of premium payment as bank is merely interested to have an insurance policy only for audit purpose.

But is this the right value of insurance or approach by banks?

What happens if any claim arises in the factory?

Let us understand this with an example. 

Assume that total property is Rs. 6 crores worth and insurance is taken for Rs. 4 crores.

The repair cost of getting back insured on same stage is estimated to be Rs. 3 crores.

What will the client’s scenario in terms of claim?

ANDAPP team will always advise a client to opt for insuring the property at Reinstatement value.

Always follow advise from a qualified & certified insurance broker who not only understands your business but also has knowledge of various clauses of the insurance trade.

Author is Prabhat Vijh- Director & Principal Officer: iAND Insurance Broker Private Limited