Insuring What Matters: A Deep Dive into Margin Clause in Property Insurance

Insurance policies can be complex and difficult to understand, but it’s important to be familiar with their terms and conditions to ensure you have the right coverage for your property. One common term used in insurance policies is the margin clause, which can limit how much your property can grow in insurable value from what was originally declared in the coverage contract. Understanding this clause is crucial to avoiding any surprises at the time of claim.

A margin clause is a section of an insurance policy that limits how much a property can grow in insurable value from what was originally declared in the coverage contract, in what’s called the “statement of value.” The margin may be stipulated as a growth percentage, such as 25% growth in value, or as a value percentage, such as 125% of the stated value of a piece of property.

At the time of claim, your insurer will calculate the allowable increase and determine whether your current valuations are within your margin. Anything outside your margin of allowable increase in value will not be insured.

“It is hereby understood and agreed, subject otherwise to the terms, conditions and exclusions of the Policy and endorsed hereon, that no adjustment shall be made unless the values reported represent an increase of more than agreed % (or unless otherwise more specifically mentioned in the Schedule) from the initial values reported. This is to include fluctuations, which may occur in the values of property under the Policy which are automatically held covered.

The additional premium shall be payable on pro-rata basis for the unexpired term of the policy, when the fluctuation is more than agreed % (or the percentage specifically agreed and mentioned in the Schedule) of the initial values reported and mentioned in the Policy Schedule.”

For example, say you have three buildings valued initially at INR 2 Crore each, for a total value of INR 6 Crore. The properties are all insured under blanket coverage. Your blanket policy includes a margin clause that limits the growth in value of coverage to 20%. Even if the market changes and the cost of repairing the buildings rises to INR 7 Crore, you would still have full coverage. That’s because the new value of INR 7 Crore is within the 20% margin (120% of INR 6 Crore) of your total original stated value of INR 6 Crore.

If, however, the value of your property increases to INR 8 Crore, your insurance payout would fall short. That’s because of INR 8 Crore is outside the 20% margin (120% of INR 6 Crore) of your total original stated value of INR 6 Crore. Not only that, but you could be hit with a penalty for underinsuring your property.

Under an escalation clause, the sum insured during the period of insurance shall be increased each day by an amount representing 1/365th of the specified percentage increase per annum. In contrast, the sum insured under a margin clause shall be increased by a pre-agreed percentage in the policy on the date of claim.

Insurers may avoid offering both margin and escalation clauses together in the policy, or as practiced by the insurers, only one of the clauses (either margin or escalation) can be applied at the time of claim.

In conclusion, understanding the margin clause is critical to making sure your property gets some cushion over sum insured at the time of claim. While insurance policies can be complex, working with your insurance broker to understand the ins and outs of margin clauses and other policy terms can help you avoid surprises and ensure you have the right coverage. PINC Insurance is committed to educating our clients and providing them with the best coverage possible.

Source: https://irdai.gov.in/