Whether it’s your home, office, warehouse, or factory — property insurance is your financial safety net against fire, theft, natural disasters, and other unforeseen events. But one of the most common (and crucial) questions people have is:
“How do I calculate the right Sum Insured for my property?”
Choosing the correct Sum Insured ensures that you’re neither underinsured (which leaves you short at claim time) nor overinsured (which means paying unnecessary premium).
Let’s break it down simply.
What Is Sum Insured in Property Insurance?
The Sum Insured is the maximum amount your insurance company will pay if your property suffers loss or damage due to an insured event (like fire, flood, or earthquake).
Think of it as the “replacement value” — how much it would cost to rebuild, repair, or replace your property and its contents if completely destroyed.
So, if your property is insured for ₹1 crore, the insurer will compensate you up to that amount, subject to policy terms and depreciation rules.
Two Main Methods to Calculate Sum Insured
When determining the sum insured, insurers in India typically use one of these two methods:
1. Reinstatement Value (Replacement Cost) Basis
This is the most common method.
It means the insurer will pay the cost of rebuilding the property as new, using materials and technology of similar kind, without deducting depreciation.
Example:
If your factory building gets damaged by fire, the insurer pays for reconstruction costs at current rates — not the original cost from when it was built.
Best suited for: Buildings, machinery, and equipment.
2. Market Value Basis
Here, depreciation (wear and tear) is deducted from the current replacement cost.
In short —
Market Value = Reinstatement Value – Depreciation
Example:
If your 5-year-old office building would cost ₹80 lakh to rebuild today but has depreciated by ₹10 lakh, the market value is ₹70 lakh — and that’s what you’ll be insured for.
Best suited for: Used assets or old machinery where you don’t want to pay higher premiums.
How to Calculate the Sum Insured for a Property
Now let’s get into the step-by-step calculation
1. For Building Structure
Estimate the current cost of construction per square foot in your area and multiply it by the total built-up area.
Formula:
Sum Insured = Built-up Area × Cost of Construction per sq. ft.
Example:
If your office building is 5,000 sq. ft. and construction cost is ₹2,000 per sq. ft.,
then Sum Insured = 5,000 × 2,000 = ₹1 crore
Include permanent fixtures like lifts, flooring, and plumbing — but exclude land cost.
2. For Machinery & Equipment
Take the replacement value of all machinery and tools — what it would cost to buy the same items today.
You can get this data from manufacturer quotations or asset registers.
3. For Furniture, Fixtures & Electronics
Make an inventory of all furniture, office fixtures, computers, and appliances. Use the market replacement cost (not old purchase price).
4. For Stock or Inventory
The sum insured should equal the maximum value of stock held during the year, including raw materials, work-in-progress, and finished goods.
If your stock fluctuates seasonally (for example, during festivals or peak production), consider a declaration policy — where you declare monthly average values to avoid over/underinsurance.
The Danger of Underinsurance
Underinsurance means your Sum Insured is less than the actual value of your property.
At the time of claim, insurers apply the Average Clause, which reduces your payout proportionately.
Example:
If your property is worth ₹1 crore but insured for ₹50 lakh, and you suffer ₹10 lakh damage —
the insurer will only pay:
₹10 lakh × (50/100) = ₹5 lakh.
So even though the loss is ₹10 lakh, you’ll get only half!
That’s why accurate valuation is essential.
Pro Tip: Use a Professional Valuer
For large properties or industrial setups, hire a chartered engineer or professional valuer to assess the reinstatement cost.
They consider current material rates, depreciation, and technical specifications to give you a precise valuation — which insurers prefer for transparency.
Final Thoughts
The Sum Insured in property insurance isn’t just a random number — it’s your lifeline when disaster strikes.
Always base it on current replacement cost, update it annually, and ensure all major assets are included.
A correctly calculated sum insured ensures you’re fully protected and get fair compensation when it matters most.
Remember Insurance can rebuild your property — but only if you’ve valued it right.
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