Sum insured, average clause and underinsurance explained
What the three terms mean
Sum insured. The amount the business declares for each item: building fit-out, plant, stock, contents. The insurer charges its rate on this figure and will not pay more than it for any one item.
Average clause. A policy condition that applies when the sum insured is less than the value of the property at the time of loss. The claim is reduced by the ratio of sum insured to actual value. The principle is old and statutory in marine insurance. Section 81 of the Marine Insurance Act 1906 states that an assured insured for less than the insurable value is deemed its own insurer for the uninsured balance. Property policies written in Singapore carry the same rule as a contract condition.
Underinsurance. The shortfall between the sum insured and the value the policy requires. It arises from old valuations, inflation, new purchases not declared, or insuring at the wrong value basis.
The formula is:
Claim paid = loss × (sum insured ÷ value at risk) − excess
Average applies to partial losses as well as total losses. That is the point most often missed.
Worked example
A food manufacturer insures its plant and machinery. The figures are an example only.
| Item | Figure |
|---|---|
| Sum insured on plant and machinery | S$1,500,000 |
| Reinstatement value at the date of loss | S$2,500,000 |
| Ratio insured | 60% |
| Damage from a fire in one production hall | S$400,000 |
| Excess | S$10,000 |
Step 1: apply average. S$400,000 × 60% = S$240,000.
Step 2: deduct the excess. S$240,000 − S$10,000 = S$230,000 paid.
The business carries S$170,000 of a S$400,000 loss. The fire damaged 16% of the plant's value. The business still carried 42.5% of the loss, mostly through average.
Had the sum insured been S$2,500,000, the payment would have been S$390,000. The extra premium for the additional S$1,000,000 of cover would have been the insurer's rate on that amount. That cost is known in advance; the average deduction is not.
Which value to insure for
Three value bases appear on Singapore property policies. The policy states which applies.
| Basis | What it means | Typical use |
|---|---|---|
| Reinstatement or replacement value | Cost to rebuild or replace new, at current prices | Buildings, fit-out, plant and machinery |
| Indemnity or market value | Replacement cost less wear, tear and depreciation | Older items, or where reinstatement is not chosen |
| Cost or invoice value | Purchase cost of stock plus freight | Stock and goods in trade |
Reinstatement is the usual basis for buildings and plant. Its sum insured must reflect the cost to rebuild or buy new, including demolition, debris removal and professional fees where included.
Strata buildings follow a statutory rule. Under the Building Maintenance and Strata Management Act, the management corporation must insure the building for its replacement value. A tenant or subsidiary proprietor insures its own fit-out, plant and stock separately.
Market value of a property is the wrong basis for a building sum insured. Market value includes land, which does not burn, and moves with the property cycle, not construction cost.
Why valuations drift
A sum insured set once becomes wrong over time. Four causes recur.
- Construction and equipment inflation. Replacement costs rise each year even when the asset is unchanged.
- New purchases. Machines and fit-out added mid-year are not added to the schedule.
- Stock swings. Stock peaks at certain months, above the fixed figure set at renewal.
- Currency. Imported plant priced in US dollars or euros costs more in Singapore dollars when the currency moves.
Claims show the cost. Singapore property insurance claims rose 60.5% in 2025, while property premiums grew 4.1% to S$864.1 million. The General Insurance Association links the rise to more fire incidents and several large losses. Every one of those claims was measured against a sum insured.
Common mistakes
- Insuring at book value. Depreciated accounting values are far below replacement cost.
- Using the purchase price from years ago. A machine bought in 2018 costs more to replace in 2026.
- Leaving out costs that follow a loss. Removal of debris, architects' fees and authority requirements add to reinstatement.
- Insuring the property's market value. Land value inflates the figure while construction cost may still be understated.
- Ignoring stock peaks. A fixed stock sum set at average levels fails at peak months. A declaration basis solves this.
- Not revaluing after changes. Extensions, mezzanines and new production lines must be declared when installed.
Many policies offer protections against average. A "first loss" basis waives average up to an agreed limit. Some wordings allow a stated margin of underinsurance before average applies. Ask the broker which applies to each section, because terms differ by insurer. The commercial property page lists the sections that need a sum insured.
Frequently asked questions
What happens to a claim if I insure for half the value?
The insurer pays half of any loss, up to the sum insured, less the excess. A S$100,000 loss on property insured for 50% of value pays S$50,000 before the excess. The same rule applies whether the loss is partial or total.
Is sum insured based on cost, market or reinstatement value?
It depends on the basis stated in the policy. Buildings and plant are usually insured on reinstatement value: the cost to rebuild or replace new. Stock is usually insured at cost. Market value of a property is not used, because it includes land.
How often should I revalue?
At every renewal, using current replacement costs. Buildings and large plant also benefit from a periodic professional valuation, since construction and equipment prices move each year. Declare new assets as they are bought, not at the next renewal.
Does average apply to business interruption cover?
Yes, in most gross profit wordings. The sum insured is compared with annual gross profit, scaled for indemnity periods longer than 12 months. An underinsured gross profit figure reduces the claim in proportion. How the indemnity period affects the figure is covered in business interruption indemnity period.
Sources
General information only, not advice on any particular policy. Cover depends on the policy wording and the insurer's terms.