Underinsurance and Over-Insurance in Turkish Policies

Sum Insured Is Not the Same as Insurable Value

The Turkish Commercial Code (Law No. 6102) defines the two separately. Insurable value, under Article 1460, is the full value of the insured interest — the real worth of the building, machine or stock. The sum insured is the figure on the policy and, under Article 1461, it caps the insurer's liability.

Article 1461 adds a second ceiling: even if the sum insured exceeds the value of the interest at the moment of loss, the insurer pays no more than the loss actually suffered. Inflating the figure therefore buys no extra cover. The only carve-out in the Code is for reinstatement-basis new-value policies.

When the two figures match, the policy is fully insured. Below the value it is underinsured; above it, over-insured. Both have concrete consequences on claim day.

Underinsurance: Why the Claim Is Prorated

Article 1462 of the Commercial Code states the rule in a single sentence: where the sum insured is less than the insurable value and part of the insured interest suffers loss, the insurer pays — unless the contract provides otherwise — in proportion to the ratio of the sum insured to the insurable value. This is what English-language policies call the condition of average.

Clause A.5 of the Fire Insurance General Conditions restates the rule in policy language and measures value at the time of the loss, not at inception. In periods of fast-moving prices, a figure that was correct a year ago can be short on the day of the fire.

The most misread part of the rule is its trigger. Average applies to partial losses; the Code speaks expressly of part of the interest suffering damage. In a total loss the sum insured is already the ceiling.

The table below isolates the effect of average. Where the policy also carries a deductible, that amount comes off the prorated figure as well — the two are cumulative, not alternative.

Where the Average Clause Applies and Where It Does Not

The Code says "unless the contract provides otherwise", and the Fire Insurance General Conditions turn that opening into a procedure. The policyholder may convert the contract so the whole loss up to the sum insured is paid without the ratio. Notified to the insurer by notary protest before the loss, the amendment takes effect from the day after notification, against the tariff premium difference.

Motor own-damage cover — kasko — works on a different basis. The Land Vehicles Kasko Insurance General Conditions provide that the insurer covers the vehicle up to its market value on the date of loss, so no fixed sum insured appears on the policy. The template annexed to those General Conditions goes further and requires an express statement that neither underinsurance nor over-insurance will be applied at claim stage.

Machinery breakdown reaches the same place by another route. Article 4 of the Machinery Breakdown Insurance General Conditions requires the sums insured to equal the new replacement values of the listed machines; where the replacement value calculated at the time of loss exceeds the sum insured, the matching proportion of the loss stays with the insured.

Under compulsory earthquake insurance — DASK, the Turkish Catastrophe Insurance Pool — the sum insured is capped by the maximum cover set for the relevant year, and the General Conditions allow voluntary earthquake cover for the building value above that cap. A DASK policy alone is therefore not full cover.

• Average typically applies to sum-insured-based property lines: fire, home package, commercial package and machinery breakdown.
• Average typically does not apply to market-value-based motor own-damage cover.
• Loss prevention and salvage costs are prorated on the same ratio where the policy is underinsured; clause B.2 of the Fire Insurance General Conditions says so expressly.

Over-Insurance: A Higher Sum Buys No More Cover

Under Article 1463 of the Commercial Code, where the sum insured exceeds the value of the insured interest the excess is void. The sum insured and the matching portion of the premium are reduced, and premium already collected on the excess is refunded to the policyholder.

Clause A.6 of the Fire Insurance General Conditions allocates the task: an insurer that becomes aware during the policy period notifies the policyholder, reduces the sum insured and the excess premium, and refunds the difference. The overpayment is not automatically lost — but somebody has to notice it.

The Code treats bad faith separately. An over-insurance contract concluded in bad faith for financial gain is void; an insurer unaware of the invalidity when contracting keeps the right to premium until the end of the period in which it learns the truth.

How to Set the Sum Insured Correctly

The first question is the valuation basis. The Fire Insurance General Conditions recognise two. On a market-value basis, depreciation, wear and tear and any marked difference in the output or quality of a new item are deducted. On a new-value basis the replacement cost of a new item applies, including transport, erection, customs duty, taxes and charges; but once the maximum depreciation rate or age stated in the policy is exceeded, the settlement reverts to market value.

The second route is agreed value. Where experts chosen unanimously assess a building, installation, machine, fixture or household contents and both sides accept the figure, it cannot be challenged at claim stage. The list is valid for at most one policy year, the expert's fee falls on the party requesting it, and agreed value is not available for trading stock. Article 1464 of the Commercial Code is the statutory counterpart and lets the insurer seek a reduction where the figure is grossly excessive.

A third detail is missed on many policies: land value is excluded from the sum insured. Folding the land share into the building figure inflates the sum and produces over-insurance.

• State the valuation basis on the policy: market value or new value?
• If you choose new value, read the maximum depreciation rate and the age limit printed on the policy.
• Strip the land share out of the building figure.
• Update the sum by endorsement when the machinery and fixtures inventory changes during the year.
• Agreed value is not available for trading stock; set the figure with stock turnover in mind.

What Happens to the Sum Insured After a Claim

Clause B.8.3 of the Fire Insurance General Conditions provides that cover ends on a total loss, while on a partial loss the sum insured is reduced, from the date of the loss, by the amount of indemnity paid. Where the sum insured is split into items or groups, the same method applies to each of them separately.

The practical consequence is that after one claim your cover for the rest of the period is smaller by exactly that amount. The same clause offers the remedy: the sum insured can be restored by paying pro rata premium from a date chosen by the policyholder. The Machinery Breakdown General Conditions set out the same mechanism unit by unit.

Policyholders who meet average for the first time on a second claim usually never noticed the reduction after the first one.

Where the Agency Fits In

Law No. 5684 on Insurance defines an insurance agency as the party that carries out the preparatory work before the contract is concluded and assists in the performance of the contract and in the payment of the indemnity. Setting the sum insured belongs to that preparatory work; whether you meet average on claim day is decided by the questions asked before the policy is issued.

RYL Sigorta Aracılık Hizmetleri Limited Şirketi operates as an insurance agency. We prepare quotations from the insurance companies we act for and put the valuation basis and the assumptions behind the sum insured in writing before issue. Indemnity is paid by the insurance company.

If you would like your sum insured reviewed, reach us through the quotation form.

Frequently Asked Questions

Sources

• Turkish Commercial Code No. 6102 — Legislation Information System
• Fire Insurance General Conditions
• Land Vehicles Kasko Insurance General Conditions
• Compulsory Earthquake Insurance General Conditions — DASK
• Insurance General Conditions — SEDDK
• Insurance Law No. 5684 — Legislation Information System

This article is for information only; the scope of cover is set by the policy’s specific and general terms.