Overview
Escalation Clause in Fire Insurance is a policy provision designed to counteract inflation and rising reconstruction costs by automatically increasing the sum insured over time. Typically structured as a fixed percentage added annually (e.g. 5–10%), this clause ensures that policy coverage remains inflation‑aligned and prevents underinsurance at the time of claim..
Key Elements
- Definition & Purpose
An escalation clause permits the automatic annual uplift of the policy’s sum insured to reflect inflation, material price rise, or updated asset values, especially relevant in case of catastrophic fire loss.
- How It Works
Coverage increases in two common ways:
- Pre‑scheduled annual rise (e.g. 5% p.a., pro‑rated daily)
- Trigger‑based uplift upon claim, if rebuilding costs exceed original coverage limits.
- Example
A ₹1 crore insured property with a 10% escalation clause would have coverage increase to ₹1.10 crore at renewal or pro‑rated across the policy year, offering better protection should rebuilding costs rise.
Benefits
- Inflation‑proof coverage: Guards against rising construction or material costs.
- Adequate protection: Helps avoid underinsurance, especially in catastrophic events.
- Peace of mind: Guarantees that value of sum insured stays relevant through the policy term.
Considerations & Drawbacks
- Premium increase over time: The rising sum insured can drive up the cost of your premium.
- Not always necessary: If the initial sum insured is already sufficient, the clause may offer little added value.
- Scope limits: Often applies only to capital assets, not stocks or movable goods.
An escalation clause in fire insurance contract allows for an increase in the sum insured to cover any unexpected costs. The unexpected costs can be a resultant to fluctuations in the market, like inflation increase the price of items, for instance.
While it is necessary to have comprehensive fire insurance to get coverage against losses or damages arising due to fire. It is also necessary to consider inflation while buying the cover as there is no point in being underinsured. The escalating inflation rate, for example, can result in hidden costs and increase the price of items.
Further, the escalator clause is also called the inflation-guard endorsement in the insurance business. As it helps in increasing your insurance coverage as per the current labor costs, raw materials, and so on.
Remember, inflation is a devil which can easily increase the price of any goods. Therefore, it is recommended to include escalator clause in fire insurance. Else, you would have to dig deep into your pocket, should your business or asset get damaged due to fire.
As they say, penny-wise and pound-foolish, one must consider including escalation clause when buying a fire insurance policy. This will ensure that your cover always stays in sync with the prevailing market scenario.
Case 1: Escalation Clause in Fire Insurance
After working for five years in the corporate world, Jayant Gupta started his own software company in Pune. Jayant also bought a fire insurance policy to get coverage against loss or damage which may arise due to fire.
At the time of buying a fire insurance policy, Jayant computed the cost of his assets at Rs. 5 lakhs. He decided to go with a cover based in his assessment. The cover was not sufficient as per the cost of the assets.
In a bid to save money, Jayant preferred to go with a low fire insurance cover. Moreover, when the agent suggested he go with an escalation clause in a fire insurance policy, he refused it.
Unfortunately, last year, a fire occurred at Jayant’s office due to short-circuit. Though no one was injured in the incident, property worth Rs.10 lakh got damaged. As Jayant had a fire insurance policy, he approached the insurer for the claim settlement.
Insurer verified the total loss at Rs. 10 lakhs. However, since Jayant had a cover of Rs 5 lakh only, insurer settled the claim accordingly.
Read More: Type of useful covers you can add to your Fire Insurance Policy
Above all, Jayant had bought a fire insurance policy when his office was under construction. At that time, the value of the property was less, which increased in five years. However, as Jayant did not include an escalation clause in his fire insurance policy, the insurance company settled the claim. It was as per the coverage value only which was not sufficient.
Here, Jayant committed the following two mistakes=
- Bought a fire insurance cover which was not sufficient
- Refused to add an escalation clause in a fire insurance policy
Jayant’s situation would have been different if he had purchased a fire insurance cover with an escalation clause. Under the escalation clause, the insurer would have considered the current value of the property at the time of claim settlement.
Additional read: How is indemnity estimated in fire insurance?
Case: 2
ajni Saran started her engineering company in Delhi. She decided to buy fire insurance to secure herself from any financial troubles, in case of damage/loss due to fire. On the advice of her insurance broker, she also included an escalation clause in her fire insurance policy.
Last year, a fire due to short-circuit resulted in lost of goods and machinery worth Rs. 10 lakhs. She approached her fire insurance company. As Rajni had also included an escalation in her fire insurance policy, the insurer considered it. The insurer considered the current price of machinery to settle the claim.
Without an escalation clause, the insurer would have settled the claim as per the cover. Thanks to the escalation price, the insurer considered the inflation as well at the time of claim settlement.
FAQs
Q) What is an escalation clause in fire insurance?
A) A clause enabling automatic uplift of the sum insured—by a set percentage—either annually or upon a triggering event, to cover inflation or rising rebuilding costs.
Q) How is the escalation clause different from a margin clause?
A) An escalation clause increases coverage in response to inflation or reconstruction cost hikes. A margin clause, by contrast, responds to changes in property market value or appreciation, without necessarily adjusting coverage during a claim event.
Q) Can the escalation clause trigger during a claim?
A) Yes—many policies let the clause activate when reconstructed damage costs exceed the current sum insured, increasing coverage automatically at claim time.
Q) How much does escalation typically increase sum insured?
A) Commonly ranges between 5–10% per annum, prorated daily. Some policies may cap total escalation or limit applicability to certain insured asset types.
Q) Why might policyholders choose to include it?
A) To stay adequately insured against inflation and avoid gaps in rebuilding security as property repair costs rise over time.
Q) Any downsides to the clause?
A) It can raise premiums over time and may be unnecessary if initial coverage is already adequate. Also, not all policies cover all asset categories under escalation terms .
About The Author
Shivani
MBA Insurance and Risk
She has a passion for property insurance and a wealth of experience in the field, Shivani has been a valuable contributor to SecureNow for the past six years. As a seasoned writer, they specialize in crafting insightful articles and engaging blogs that educate and inform readers about the intricacies of property insurance. She brings a unique blend of expertise and practical knowledge to their writing, drawing from her extensive background in the insurance industry. Having worked in various capacities within the sector, she deeply understands the challenges and opportunities facing property owners and insurers alike.
