You buy a building for S$2 million. You insure it for S$2 million. Three years later, a fire destroys half of it. The repair bill comes to S$900,000. You expect the insurer to pay S$900,000.
The insurer pays S$450,000.
The reason is a clause in almost every property insurance policy in Singapore called the average condition, sometimes referred to as the co-insurance clause. It is one of the most consequential and least understood provisions in general insurance, and it affects every business that holds property cover, SME package insurance, industrial all risk insurance, or any policy that insures physical assets against loss or damage.
This post explains what under-insurance is, how the average condition works, and what it means in practice for the sum insured you declare on your policy.
What is the sum insured and why does it matter?
The sum insured is the maximum amount the insurer will pay in the event of a total loss. It is also the figure the insurer uses to calculate your premium and, critically, to assess whether you have insured your property at its full value.
For a property policy, the sum insured should reflect the full reinstatement cost of the insured asset: what it would cost to rebuild, repair, or replace it to its pre-loss condition. This is not the same as the market value of the property, which includes the land and reflects what a buyer would pay. It is not the original purchase price. It is the cost of reinstating the physical structure or contents to the same standard, at current construction and material costs.
If the sum insured is set below the actual reinstatement cost, the policy is under-insured. And under-insurance has a specific financial consequence when a claim is made.
How the average condition works
The average condition applies a proportional reduction to any claim payout when the sum insured is less than the actual value of the insured property at the time of the loss.
The formula is straightforward.
Claim payout equals the sum insured divided by the actual value, multiplied by the loss.
Working through the example at the top of this post: a building with an actual reinstatement cost of S$4 million is insured for S$2 million. The sum insured is 50% of the actual value. A fire causes S$900,000 of damage. Under the average condition, the insurer pays 50% of S$900,000, which is S$450,000. The remaining S$450,000 is borne by the policyholder.
The policyholder has, in effect, self-insured 50% of every loss by under-insuring the property. The insurer treats the shortfall as though the policyholder chose to retain that portion of the risk.
It does not matter that the loss was partial. The average condition applies to any claim, whether the loss is total or partial. A small claim on an under-insured policy is reduced by the same proportion as a large one.
Why under-insurance happens
Under-insurance is rarely deliberate. It typically arises in one of three ways.
The sum insured was set at inception and never reviewed. Construction costs in Singapore increased significantly between 2020 and 2025. A building insured in 2019 at a sum that reflected reinstatement costs at that time may be materially under-insured today if the policy has simply renewed at the same figure each year. The Building and Construction Authority's construction cost data shows that building costs for industrial and commercial properties rose by over 30% between 2020 and 2024. A sum insured that was adequate five years ago may now be 25% to 35% below the actual reinstatement cost.
The sum insured was set at purchase price or market value rather than reinstatement cost. Market value and reinstatement cost are different figures. A shophouse in Tanjong Pagar may have a market value that reflects its location, the land premium, and comparable transaction prices. Its reinstatement cost is what it would cost to rebuild the structure at current material and labour rates if it burned to the ground. For older properties in prime locations, the market value may significantly exceed the reinstatement cost. For newer industrial properties, the relationship may be closer. Neither figure is automatically a reliable proxy for the other.
Contents and fit-out were not separately and accurately declared. A business that insures its office contents as a single lump sum without reviewing the actual value of furniture, equipment, specialist installations, and fit-out may find that the declared figure is significantly below the true replacement cost. This is particularly common in F&B and retail businesses where a commercial kitchen fit-out or a bespoke retail interior represents a significant and often underestimated sum.
The reinstatement value versus indemnity value distinction
Most commercial property policies in Singapore offer a choice between two bases of settlement.
Reinstatement value cover pays the cost of reinstating the damaged property to its pre-loss condition using new materials, at current costs, without deduction for depreciation. This is the appropriate basis for a business that needs to rebuild and continue operating.
Indemnity value cover pays the market value of the damaged property at the time of loss, after deduction for age and depreciation. For an older piece of equipment or a building that has depreciated significantly, the indemnity payout may be substantially less than the cost of replacement.
If the policy is written on an indemnity basis, the sum insured should reflect the indemnity value of the asset, which decreases over time. If it is written on a reinstatement basis, the sum insured should reflect the full current reinstatement cost, which generally increases with inflation and construction cost movements.
Knowing which basis your policy is written on, and whether your sum insured reflects that basis, is the first practical step in assessing whether you are adequately insured.
How to calculate the right sum insured
For a commercial or industrial building, the most reliable approach is to obtain a reinstatement cost assessment from a qualified valuer or quantity surveyor. This produces a documented estimate of the cost to rebuild the structure to its current specification at current construction rates. Many insurers accept or require this for properties above a certain value.
For business contents, stock, and fit-out, a schedule of values that lists individual items or categories with their current replacement cost is the most defensible approach. This does not need to be an exhaustive inventory of every item but should reflect the major categories of assets held on the premises at any given time.
For stock, the sum insured should reflect the maximum value held at any point in the year, not an average. A retailer who holds S$30,000 of stock most of the year but S$80,000 in the month before a major sales period is under-insured for ten months of the year if the sum insured is set at S$30,000.
Reviewing the sum insured at every renewal, not just at inception, and updating it when there are material changes to the property or its contents, is the minimum discipline required to avoid unintended under-insurance.
What to do if you are not sure
The starting point is to pull out the policy schedule and compare the declared sum insured against your best current estimate of what it would cost to reinstate the property or replace the contents. If the two figures are materially different, that difference is the uninsured portion of every future loss.
You can read more about our SME package cover and Industrial All Risk cover on the products page.
If you would like to review the sums insured on your current property or SME package policy against the actual reinstatement value of your assets, we would be glad to work through it with you.
This article provides general information only. It is not insurance advice. Policy availability, terms, conditions, and exclusions vary by insurer and product, and cover is subject to the full policy wording. Please contact TZY CO for advice on your specific situation.