Fire in a Paper-Reel or Plastics Godown: The Underinsurance Clause That Hurts More Than the Fire

If a godown holds ₹5 crore of stock insured for ₹3 crore and a fire destroys ₹1 crore of it, the formula in the Bharat Laghu and Bharat Sookshma wordings read on 17 Oct 2026 gives ₹60 lakh, not ₹1 crore: below 85% of value, the insured bears "a proportionate share of the loss".

Last checked: 17 Oct 2026. By the Mama Editorial Team, for owners of paper, board, film and granule godowns who sign the fire renewal every year. This is not insurance or legal advice. Your policy schedule and the insurer settle every claim, so ask your broker how your own policy reads.

Key takeaways

• The clause is in the standard text. Clause F of the Bharat Laghu Udyam Suraksha wording says underinsurance "will reduce proportionate to the difference" the amount the insurer pays (New India, UIN IRDAN190RP0012V02202021; the same text in IFFCO-Tokio Sookshma, checked 17 Oct 2026).
• The 15% cushion only works if you stay above 85%. Both Bharat products waive underinsurance "upto 15%". Below 85% of value, you "bear a proportionate share of the loss".
• Stock is judged on its own. "Every item of Insured Property is subject to this condition separately." Extra cover on the building does not top up thin cover on stock.
• Value is cost, not invoice. Stock is valued at landed cost for raw material, input cost for work in process and manufacturing cost for finished goods.
• Stock you hold for customers counts. "Insurable Assets" include property you "hold in trust or on commission", even if you have not insured it.
• SFSP has no cushion. Condition 10 of the New India Standard Fire and Special Perils wording (UIN IRDAN190RP0046V01100001) treats the insured "as being his own insurer for the difference"; no underinsurance waiver was found in that text (checked 17 Oct 2026).

Verified against

All documents below were read in full text on 17 Oct 2026. The UIN printed on each is the insurer's product filing number with IRDAI.

• New India Assurance, Bharat Laghu Udyam Suraksha Policy wording, UIN IRDAN190RP0012V02202021: scope, definitions, basis of sum insured, Clause F, duty of disclosure.
• IFFCO-Tokio, Bharat Sookshma Udyam Suraksha Policy wording, UIN IRDAN106RP0002V03202021: scope, Clause F (the same text as New India Laghu), floater stocks, explanatory note, Declaration Policy for Stocks add-on.
• New India Assurance, Standard Fire and Special Perils Policy wording, UIN IRDAN190RP0046V01100001: Condition 10, average.

Which wording your godown sits under

The Bharat products split by the total value at risk at one location: building, machinery and stock added together, not the stock alone.

The New India Laghu wording also says what happens when your values move across a threshold mid-year. If the value at risk "either exceeds ₹ 50 Crore or reduces below ₹ 5 Crore during the Policy Period", the policy "shall, on expiry, be replaced by the applicable policy". The IFFCO-Tokio Sookshma wording has the matching proviso for a value that "exceeds ₹ 5 Crore during the Policy Period": replacement also comes "on expiry".

What the clause actually says

Clause F of the New India Laghu wording, checked 17 Oct 2026, has five parts. The IFFCO-Tokio Sookshma wording carries the same five points.

1. The sum insured "for each item of Insured Property must be sufficient to pay for Reinstatement/Replacement of that Property on the date of loss."
2. "Every item of Insured Property is subject to this condition separately."
3. "We will waive underinsurance upto 15%."
4. If the sum insured "is less than 85% of the value of Insurable Assets, You will be responsible for the difference and You will bear a proportionate share of the loss."
5. "Underinsurance will not apply to Cover for Specific Contents" (the small in-built covers for money, documents and similar).

The IFFCO-Tokio Sookshma wording explains the waiver in plain terms: "difference upto 15% is ignored, but beyond that underinsurance is applicable to the full extent." Once you fall below 85%, the full proportion applies.

The date that matters is the date of loss. The test compares the sum insured with the value on the day of the fire, not the value you declared at renewal.

How a godown's stock is valued for this test

For stock, the New India Laghu wording sets the basis of sum insured by stage, checked 17 Oct 2026:

Two definitions widen what is counted. "Insurable Assets" cover stock you "hold in trust or on commission, or are legally responsible for as part of Your trade, even if You have not taken insurance cover for any of them". Board or film a brand owner sends you for job-work can therefore sit inside the value the insurer tests against.

Worked example: one godown fire, five ways it can settle (₹)

Assume a corrugated box plant whose building, machinery and stock at one location total ₹22 crore, so it sits under Bharat Laghu. Its stock is insured as a separate item. On the day of the fire the godown holds ₹5 crore of reels and finished cartons at cost. The fire destroys ₹1 crore of it. All figures are our assumptions. The payout ignores any excess or deductible in the schedule.

The arithmetic is loss × (sum insured ÷ value at risk). In scenario A: ₹1 crore × 3 ÷ 5 = ₹60 lakh. Because the ratio is applied to every rupee of the claim, the ₹ gap grows with the size of the loss. The surveyor and insurer assess the actual claim under the policy schedule.

Declaration and floater cover for stock that swings

Paper and plastics stocks swing with the season and with raw-material price moves. Assume a plant buys granules ahead of an expected price rise and doubles its stock for six weeks. A fixed sum insured set in April does not follow that.

The IFFCO-Tokio Sookshma wording offers a "Declaration Policy for Stocks" add-on, "for frequent fluctuations in stock/stock values", checked 17 Oct 2026. Its main terms:

• You declare stock value monthly, as either the "average of the value at risk on each day of the month" or the "highest value at risk during the month".
• "The value for Your declaration shall be the market value", and a loss "shall be settled on the basis of the market value immediately before the loss". This differs from the cost basis in the main wording.
• A separate declaration is required "relating to each separate location".
• The declaration is due "before the last day of the succeeding month". If you miss it, the insurer takes the schedule sum insured as the value at risk.
• Premium is adjusted at expiry on the average declared value; any refund is capped at 50% of the provisional premium.
• If the last declaration before a loss is lower than it should have been, the insurer pays "only that proportion of loss which the amount in the last declaration bears to the amount that ought to have been declared".

That last term recreates scenario A. Assume you declared ₹3 crore when ₹5 crore was in the godown: a ₹1 crore loss again pays ₹60 lakh.

For stock at more than one godown, the same wording includes an in-built "Stocks at many locations on floater basis" cover. It requires that all locations are declared and shown in the schedule, that stocks are declared as one aggregate value, and that you have "a good internal audit accounting procedure" showing the amount at risk at each location at any time.

Checklist of points to raise with your broker

These are questions that follow from the wordings above. The answers depend on your own policy schedule, and your broker and insurer decide how it applies.

• Which wording does the schedule name: Sookshma, Laghu or SFSP? The cushion differs.
• How does the stock figure in the bank stock statement, at cost, compare with the stock sum insured?
• Is stock held for customers on job-work part of the "Insurable Assets" for your policy?
• What was the peak stock value in the year, and is the policy on a fixed or a declaration basis?
• On a declaration basis, what are the monthly declaration dates and the declared value basis?
• Under the "every item ... separately" wording, how is each of stock, building and machinery covered?
• How does the policy treat a mid-year increase in stock? Ask for the answer in writing.

What cameras cannot do here

A camera cannot value stock. Under the wording, value is a cost figure, and it comes from purchase records, the stock register and the bank stock statement.

A camera also cannot change the arithmetic. Footage can show the extent of the fire and that goods were in the godown. The proportion is set by the sum insured against the value on the date of loss. For how footage and declared CCTV play in the claim itself, see what insurers ask about CCTV in Indian factories and whether insurance pays less if your CCTV wasn't recording. To cut the fire risk in the first place, see the cotton godown fire walk and what fire NOC inspectors look for.

Where Mama fits

Mama reads a factory's existing cameras and each morning tells the owner, in plain language, where machine hours and money leaked the day before. In a packaging plant that includes reels and sheets waiting between machines, which is also stock you carry and insure. Mama does not value stock or replace the stock register. To see what cash sits in slow stock, try the stock ageing cash calculator. Leave an email or phone in the form below.

FAQ

What is the average clause in fire insurance in India? It is the condition that cuts a claim when the sum insured is below the value of the property on the date of loss. Condition 10 of the New India SFSP wording says the insured "shall be considered as being his own insurer for the difference and shall bear a rateable proportion of the loss accordingly" (UIN IRDAN190RP0046V01100001, checked 17 Oct 2026).

Does the Bharat Laghu Udyam Suraksha policy have an underinsurance clause? Yes. Clause F reduces the claim in proportion, waives underinsurance "upto 15%", and applies to each item separately. Below 85% of value, you "bear a proportionate share of the loss" (New India Laghu wording, UIN IRDAN190RP0012V02202021, checked 17 Oct 2026).

My stock is underinsured but my building is overinsured. Does that balance out? Not under the wordings we read. Both the Bharat Clause F and SFSP Condition 10 say every item of the policy is subject to the condition separately. Stock is tested against stock value alone.

How is stock valued for the underinsurance test? At cost, not selling price. Per the New India Laghu wording, raw material is valued at landed cost at your premises, work in process at input cost, and finished goods at manufacturing cost, or contract price for goods sold but not delivered.

Does a stock declaration policy remove underinsurance? It moves the test to your monthly declarations. Under the IFFCO-Tokio add-on, if the last declaration before a loss was too low, the insurer pays only the proportion that the declared amount bears to what ought to have been declared. A late declaration is replaced by the schedule sum insured.