By Felix Kong｜Licensed Insurance Agent
Looper Insurance Agency Limited (GA1034)
Published: 2026-08-31｜Last updated: 2026-08-31
The "Sum Insured" box on a proposal form gets filled in fast. Owners glance at last year's schedule, or ask the accountant for the figure sitting in the fixed asset register. That box is not a pricing input. It is a statement to the insurer that this is what the property is worth, and underwriting, premium and settlement all run off it. Set it low and the premium saving is real, but so is a discount you never knowingly bought: a total loss falls short, and a partial loss, a fire in one corner of the shop, gets cut back by the same proportion. This guide covers the three ways property gets valued, how an average clause operates, and the two figures Hong Kong owners understate most often.
Table of Contents
Three ways to value: reinstatement, market value, book value
How the average clause works
The two figures owners understate: fit-out and stock
Keeping replacement cost current
A six point checklist for owners
FAQ
1. Three ways to value: reinstatement, market value, book value
A sum insured does three jobs in a property policy. It is the underwriting basis, the ceiling on any claim, and the measure of whether you declared the risk accurately. The question is not how much cover you would like to buy but what the property is worth. Run the same contents through three conventions and you get three very different numbers.
Basis | What it measures | Result | Typically used for |
|---|---|---|---|
Reinstatement / replacement cost | Cost today of an equivalent new item or equivalent works, including delivery, installation, debris removal and fees | Highest | Building fabric, fit-out, plant and machinery |
Market value / indemnity value | Value immediately before the loss, that is replacement cost less depreciation | Middle | Second hand equipment, items on an indemnity basis |
Net book value | Original cost less accumulated depreciation, an accounting convention | Lowest | Internal accounts and tax returns, not a sum insured |
The third causes the trouble, precisely because it is the figure already to hand. Book value falls at a speed set by tax and accounting rules, unrelated to what an equivalent new item costs today.
Hong Kong's Inland Revenue Department explains in Departmental Interpretation and Practice Notes No. 7 that capital expenditure on machinery and plant attracts an initial allowance of 60%, with annual allowances computed on the reducing value of each class at rates prescribed by the Board of Inland Revenue, and a general rate of 20% for items not specifically listed. A machine in service for a few years can sit at a very small figure in the books while still costing full market price to replace. Setting a sum insured from net book value lets a tax depreciation schedule decide what your claim will be. (Source: IRD DIPN No. 7, paragraphs 18 and 21.)
In practice, the property sections of commercial fire and business package policies here are usually written on a reinstatement basis: the insurer repairs or reinstates the damaged part to a condition similar to but not better nor more extensive than new. Where the property is not in fact reinstated, settlement can revert to a value net of wear and tear.
2. How the average clause works
Most owners read underinsurance as "the worst case is a claim capped at the sum insured." Under a policy carrying an average clause, that is not what happens. The clause, also called a pro rata condition of average, does one thing:
Settlement = amount of loss x (sum insured / the sum insured that should have applied at the date of loss)
Two features deserve attention. First, this bites on partial losses. On a total loss the sum insured is already the ceiling and no average clause is needed to leave you short. It is the fire that damages one section, well inside the limit, where average does its work. Second, the denominator is the correct value at the date of loss, not the value on the day you bought the policy. Declare accurately, leave the figure untouched for two years, and price movement alone puts you into underinsurance.
The legal position splits in two here.
Marine | Fire and commercial property | |
|---|---|---|
Legal basis | Marine Insurance Ordinance (Cap. 329), section 81 | No equivalent statutory provision |
What it says | Insured below the insurable value, the assured is his own insurer for the balance | Set out in the policy conditions |
When it applies | Automatically, by statute | Only where the policy carries an Average condition |
What to do | Check the insurable value | Turn to the Conditions page and look for Average |
Section 81 of the Marine Insurance Ordinance (Cap. 329) is blunt: where the assured is insured for an amount less than the insurable value, or in the case of a valued policy for an amount less than the policy valuation, he is deemed to be his own insurer in respect of the uninsured balance. The Ordinance was enacted in Hong Kong in 1961 and follows the English Marine Insurance Act 1906. Fire and commercial property policies have no equivalent statute, but an Average condition is standard wording in the commercial fire policies written in this market. So whether the risk applies to you is not guesswork. It is a matter of reading the policy.
3. The two figures owners understate: fit-out and stock
Tenant's improvements. The number most owners reach for is what the fit-out cost when it was built. The sum insured answers a different question: starting from a burnt out shell, what does it cost to strip out, clear away and rebuild fit-out of the same standard today. That figure carries debris removal, any architect or engineering fees, and price movement between the loss and the reopening. There is also a blind spot specific to leased premises. The landlord's building policy covers the fabric of the building, while partitions, ceilings, flooring and fixtures installed by the tenant are the tenant's own exposure. Shops that declared no fit-out sum insured at all, assuming the landlord has it covered, are not rare among the policies we review.
Stock in trade. Stock is usually settled at cost of purchase, not the retail price you sell at, so estimating from turnover starts in the wrong direction. More importantly, stock moves. The consignment brought in ahead of Lunar New Year, Christmas or a major promotion is often the highest holding of the year, and an annual average is a decision to be underinsured in the month the exposure peaks. Some business packages carry a seasonal increase provision for stock, but it applies over specified dates and on stated declaration terms. Goods held in trust and customer items in for repair are another point to settle in advance.
Item | How owners usually declare it | How it should be declared | Where the gap comes from |
|---|---|---|---|
Fit-out | The original contract price | Rebuilding equivalent fit-out today, plus strip out, debris removal and fees | Price movement, omitted removal costs |
Plant and machinery | Net book value | An equivalent new machine today, including delivery, installation and commissioning | Tax depreciation strips out most of it |
Stock | Annual average or retail price | Cost of purchase at the seasonal peak | The peak month gap |
POS and till systems | Hardware price only | Hardware plus reconfiguration; data restoration has its own limit | Software and data omitted |
Signage, glazing, air conditioning | Treated as somebody else's | Read the lease; whatever is yours belongs in the sum insured | Responsibility never established |
4. Keeping replacement cost current
"Inflation" is too loose a word here. What an owner tracks is the cost of rebuilding this particular set of assets, and that line does not only move upward. Hong Kong publishes a free quarterly official series that works as a sanity check: the Building Works Tender Price Index (BWTPI), compiled by the Architectural Services Department, with the first quarter of 1970 set at 100.
Quarter | BWTPI |
|---|---|
Q1 2022 | 1696 |
Q1 2023 | 1785 |
Q1 2024 | 1840 |
Q3 2024 | 1856 |
Q1 2025 | 1855 |
Q4 2025 | 1836 |
Q1 2026 | 1836 |
The index rose from 1696 in the first quarter of 2022 to 1836 in the first quarter of 2026, roughly 8% across four years. It reached a high of 1856 in the third quarter of 2024, then flattened and eased back to 1836 by the fourth quarter of 2025. Follow figures that can be checked, not a general sense that everything has become more expensive. (Source: Architectural Services Department, Building Works Tender Price Index open data; latest reading Q1 2026.)
Use it carefully. The BWTPI measures tender prices for new building works under the government's Capital Works Programme, does not reflect building services works, and is not a proxy for what a contractor will quote to fit out your shop. It shows direction and magnitude, not a multiplier to drop into a policy. Three steps: ask a contractor or supplier what it costs to rebuild today, use the index to test the movement since you last set the sum insured, then check the policy for an escalation provision and its cap. If equipment or stock is bought in foreign currency, exchange movement pushes replacement cost too, and every sum insured should state its currency (HKD).
5. A six point checklist for owners
Start at the Conditions page. Look for Average or a pro rata condition of average. If it is there, partial losses get scaled down.
Declare item by item. Contents, tenant's improvements, stock and machinery each get a figure. A single combined number leaves nothing to argue with.
Price fit-out at today's rebuild cost. Add strip out, debris removal and fees, and confirm nothing falls into the gap between the landlord's policy and yours.
Set stock at the seasonal peak cost of purchase. If the policy carries a seasonal increase provision, read its dates and declaration terms word for word.
Revalue before every renewal. Notify the insurer in writing straight after a major refit, new machinery or a move.
Confirm the settlement basis. Reinstatement or indemnity? Is wear and tear deducted if you do not reinstate? How long is the indemnity period, and what is the excess?
Three findings come up repeatedly when we review a shop's policy: the fit-out sum insured has not moved since the business opened, stock is declared at an annual average rather than the seasonal peak, and the owner had no idea the policy carried an Average condition. None of that shows on the premium. You see it in the schedule and the conditions. Looper Insurance Agency Limited (GA1034), a licensed insurance agency, compares commercial property, business package and business interruption options across several insurers and will work through your sums insured.
FAQ
Q: What is an average clause, and why can a claim be reduced when the loss is well under the limit?
A: An average clause, or pro rata condition of average, is a policy condition. Where the sum insured is lower than the value that should have applied at the date of loss, settlement is scaled down in the same proportion: "amount of loss x sum insured / correct sum insured". A loss far below the limit is still cut back. It is not a statutory requirement for fire cover here, so read the Conditions page.
Q: Should the sum insured be reinstatement cost or market value?
A: It follows the settlement basis in the policy. On a reinstatement basis, the sum insured reflects what an equivalent new item or equivalent works cost today, including delivery, installation, debris removal and professional fees. On an indemnity basis, settlement is net of depreciation. Mixing the two is a common route into underinsurance, so confirm the basis in writing.
Q: What is wrong with using net book value?
A: Net book value reflects accounting and tax depreciation, not market replacement cost. The Inland Revenue Department's Departmental Interpretation and Practice Notes No. 7 sets a 60% initial allowance for machinery and plant, with annual allowances on reducing value (20% generally for items not listed). Book figures fall faster than market prices, so declaring from them almost guarantees underinsurance.
Q: For a leased shop, does the landlord insure the fit-out or do I?
A: Normally the tenant does. A landlord's building policy covers the fabric of the building, while partitions, ceilings, flooring and fixtures added by the tenant are the tenant's to insure, subject to the lease and both policies. Read the lease's insurance clauses alongside your own policy and confirm no part of the fit-out is left to the other side.
Q: If I over declare the sum insured, will the claim be bigger?
A: No. Property insurance indemnifies the actual loss, so a sum insured above true value buys nothing except a higher premium. Accuracy is the objective, not reassurance. Effort is better spent on the settlement basis, the excess and the indemnity period, the terms that decide what gets paid.
Next step
A sum insured review does not have to wait for renewal. On a commercial fire, business package or property policy, three pages tell you most of what you need: the individual sums insured on the schedule, whether Average appears in the conditions, and whether the settlement basis reads reinstatement or indemnity. Send us the policy with your latest fit-out or equipment quotation and we will go through it item by item.
Related Articles
Shop Package or Standalone Public Liability? A Decision Guide for Hong Kong SMEs
Public Liability Insurance in Hong Kong: An English Guide for Businesses and Owners
From Subdivided Flat to Basic Housing Unit: Three Policies to Settle Before the Works Start
One Fake Email Stopped the Business for Three Days: Cyber Insurance for Hong Kong SMEs
Free Quote
Looper Insurance Agency Limited (GA1034) offers a free policy check and quotations for commercial property, business package and business interruption cover.
Tel: 2633 6813
Email: cs@looperin.com
Website: www.looperin.com
Disclaimer: This article is for reference only and does not constitute insurance, accounting or legal advice. Legislative references follow the Marine Insurance Ordinance (Cap. 329) and tax references follow current Inland Revenue Department guidance; actual coverage is subject to policy terms and conditions. For tax or legal advice, consult the relevant professional.
免責聲明：本文僅供參考，不構成保險、會計或法律建議。實際保障範圍及條款以保單條文為準。如需專業保險建議，請聯絡持牌保險代理。
Conclusion
The costly assumption is that a partial loss is safe as long as it falls short of the sum insured. Under an average clause it is not: even a fire in one corner gets cut back by the same proportion the sum insured falls short of the correct value, and fit-out and stock are the two figures owners consistently underdeclare. Talk to us about reviewing your sums insured before the next renewal.
Felix Kong
CEO
繼續閱讀
