Overcoming the “Under-Insurance” Trap in Manufacturing

The Real Indian Business Challenge

In the Indian industrial landscape, a dangerous misconception often prevails: the belief that insurance should be based on the “Book Value” (depreciated accounting value) of assets. While this approach makes sense for tax purposes, it is catastrophic for risk management. When a machine is destroyed, you cannot replace it with an old machine; you must buy a new one at current market prices. This gap between “Book Value” and “Replacement Cost” creates a hidden financial trap known as Under-Insurance, which allows insurers to heavily penalize claims using the “Condition of Average.”

The Client Scenario

A well-established auto-component manufacturer in the industrial belt of Maharashtra faced this exact crisis. A short circuit in a control panel triggered a fire in their primary paint shop, destroying a critical, custom-imported coating unit.

The manufacturer was confident. They had paid their premiums on time for ten years. However, when the surveyor arrived, the reality shifted.

• Cost of New Machine: ₹4.5 Crores
• Sum Insured (Book Value): ₹2.2 Crores

The surveyor invoked the Condition of Average. Since the machine was insured for only 50% of its replacement cost, the insurer was legally entitled to slash the claim payout by the same percentage. The client was offered a settlement of barely ₹1.1 Crores on a ₹4.5 Crore loss. This deficit was large enough to cripple their cash flow and halt production for months.

The Disha Insurance Intervention

The client approached Disha Insurance in a state of panic. We immediately deployed our claims consultancy team to audit the case. We moved beyond simple paperwork to conduct a technical defense of the client’s position.

Our strategy focused on three pillars:

• Forensic Asset Valuation: We analyzed the client’s capital expenditure history. We discovered that while the main machine was old, the client had recently installed substantial upgrades and retrofits. We argued that these upgrades should be treated as distinct “New Assets” rather than part of the depreciated unit.
• Market Benchmarking: The surveyor had based the “New Replacement Value” on a European quotation. Our team sourced alternative, technically equivalent quotations from Asian markets, proving that the actual replacement cost was lower than the surveyor’s estimate. This significantly reduced the “Under-Insurance” gap.
• Policy Interpretation: We leveraged the “Reinstatement Value Clause” effectively, proving that the client’s intent was always to insure for replacement, and the valuation error was a technical oversight, not a deliberate attempt to save premium.

The Outcome Through rigorous negotiation and technical evidence, Disha Insurance successfully convinced the insurer to revise the assessment. The heavy penalty was waived, and the claim was recalculated based on the functional value of the upgraded machinery.

• Initial Offer: ₹1.1 Crores
• Final Settlement Secured: ₹3.8 Crores

The Strategic Value

The difference of ₹2.7 Crores meant the factory did not have to take a high-interest emergency loan. They replaced the machinery and resumed operations within 45 days, saving critical contracts with their OEM buyers. This case exemplifies our core promise: we do not just sell policies; we ensure that when a crisis hits, your business survives.