Sum Insured (SI) Vs. Sum Assured (SA)
Customers may have come across the terms “Sum Assured” (SA) or “Sum Insured” (SI) in their policies. Mostly in all life insurance policies and in Personal Accident (PA) covers, the term SA is used to represent the maximum insured amount the insurance company has covered under such policies, whereas in the case of majority of the policies where properties and liabilities are covered, the term SI is used. The term “Sum Insured” has an underlying principle “indemnity” and indemnifying the insured means restoring the insured to the same financial position as before the event that gave rise to the claim. So, settlement of claims under indemnity-based insurances is a bit complicated as compared to Sum Assured claims which are also known as “benefit based” insurances.
Restoring the insured to the same financial position as before the accident calls for ensuring that the customer is neither put to loss nor allowed to gain. Fundamentally, the insurance contracts are expected to ensure that the policyholder does not realise more value out of the damaged / destroyed property / liability. If after every accident the insured is allowed to realise more financial value than the loss value suffered, you can imagine that with the human nature being what it is, what will happen to the properties that are built with great human effort and utilizing the best of resources. In order to ensure that the principle of indemnity is followed, there are a few additional concepts coming into play, such as Depreciation, Salvage Collection / Deduction and Subrogation.
Since it is not possible to exactly replace the insured’s property that is destroyed in an accident, insurance companies allow customers to buy similar property/ similar brand-new property. When similar brand-new property or parts of the damaged machinery are purchased, the insured is supposed to be receiving a new part or property in place of the destroyed old one. To that extent there could be improvements and in order to ensure that the insured is only indemnified, the insurance companies expect the insured to pay for the difference in cost of the brand-new property or the brand-new part in the place of property or damaged old part of which some life has been already utilized for a certain number of years that it was in use. This contribution which is deducted from the claim is called “Depreciation: and this is to ensure that the insured is restored to the same financial position as before the accident.
Over a period, certain modifications have come into this principle by introducing some Add-on covers or improvements in the insurances, such as new for old / Nil depreciation covers at an extra premium.
In order to ensure that the principle of indemnity is strictly followed, insurers insist on deducting the salvage value from the claims. In an accident when a particular property / machinery is damaged either fully or partially, it is either replaced or repaired. While repairing some parts may have to be replaced. The damaged parts may have some intrinsic value. In order to ensure that the principle of indemnity is followed strictly, such value of the damaged part is deducted from the claim being paid to the insured and the insured is free to dispose off those damaged parts and realize their value.
Sometimes when an accident happens wherein the insured property is damaged and the insured is compensated by the insurers for the loss he suffered, if the accident happens to the insured property due to negligence on the part of a third party, the insured would have the right to recover against such negligence from the third party that caused the accident. Having paid the insurance claim, the insurance companies, in some cases, may take over the legal rights of the insured against the erring third party so as to carry on the recovery proceedings against the erring third party, and also to ensure that the insured is not left with an opportunity of once again recovering the loss from the third party. Any such recoveries made, apart from rendering poetic justice to errant / negligent parties would also bring down the overall claim outgo of the insurers and ensure premium rates do not go up unnecessarily.
Benefit based policies (Sum Assured)
These types of policies cannot be subject to the strict principles of indemnity as it is applicable in the case of properties and liabilities. Particularly where the human life / disabilities are involved it is not possible to arrive at strict indemnity as in the case of non-life insurances, since human life is invaluable. In such insurances, the term “Sum Assured” is used as against “Sum Insured” as used in indemnity-based policies. However, even in the case of life insurance and PA covers some due diligence is exercised while undertaking the risk by taking into account the insured’s income, occupation and age and SA is allowed based on the underwriting policies of the insurance companies concerned. This is to ensure no unduly over insurance takes place.