INTRODUCTION
A fire insurance is a contract under which the insurer in return for a consideration
(premium) agrees to indemnify the insured for the financial loss which the latter may suffer
due to destruction of or damage to property or goods, caused by fire, during a specified
period. The contractspecifies the maximum amount, agreed to by the parties at the time of the
contract, which the insured can claim in case of loss. This amount is not, however , the
measure of the loss. The loss can be ascertained only after the fire has occurred. The insurer
is liable to make good the actual amount of loss not exceeding the maximum amount
fixed under the policy. A fire insurance policy cannot be assigned without the
permission of the insurer because the insured must have insurable interest in the property
at the time of contract as well as at the time of loss. The insurable interest in goods may
arise out on account of (i) ownership, (ii) possession, or (iii) contract. A person with
a limited interest in a property or goods may insure them to cover not only his own
interest but also the interest of others in them. Under fire insurance, the following
persons have insurable interest in the subject matter:-
Owner
Mortgagee
Pawnee
Pawn broker
Official receiver or assignee in insolvency proceedings
Warehouse keeper in the goods of customer
A person in lawful possession e.g. common carrier, wharfing, commission agent.
The term 'fire' is used in its popular and literal sense and means a fire which has
'broken bounds'. 'Fire' which is used for domestic or manufacturing purposes is not fire as
long as it is confined within usual limits. In the fire insurance policy, 'Fire' means the
production of light and heat by combustion or burning. Thus, fire, must result from
actual ignition and the resulting loss must be proximately caused by such ignition. The phrase
'loss or damage by fire' also includes the loss or damage caused by efforts to extinguish fire.
History of fire Insurance
Losses caused by fires increased as people began to move from the country into the towns.
To help unfortunate victims the guilds of craftsmen raised money, and appeals were made in
churches. During the seventeenth century, fires which engulfed huge areas of towns grew in
number and included the Great Fire of London in 1666.
A year after the Great Fire, Nicholas Barbon set up a scheme which eventually became The
fire Office and soon, that of the City of London Corporation followed. During the next
century more similar schemes were established, but they varied in the way premiums were
calculated and losses compensated. It became the practice with a scheme to issue a plate or
company emblem to be displayed on the wall of the house at first floor level. These plates
(called fire marks) not only indicated the homes of those with insurance so that the company-
owned fire brigade could locate them when called, but they also provided free advertising. In
1833 the company fire brigades in London joined together to form what eventually became
the London Fire Brigade, supplementing the municipal and other private brigades.
In 1861, after a number of quite large conflagrations, a catastrophic fire took place on the
south side of the river Thames between London Bridge and Tower Bridge in Tooley Street
where the buildings were considered by the insurance companies to be among their best risks.
The result was a panic among insurers and the doubling or trebling of premiums. The
merchants called a meeting at which they founded their own insurance company (the
Commercial Union) and asked the Government to take over the London Fire Brigade. In
1865 the Metropolitan Board of Works took it over while the insurers decided on more co-
operation among themselves in regard to premiums and rating. A system was also established
whereby insurers paid a levy based on the total sums insured in the London Fire Brigade area
to help support the brigade.
The Industrial Revolution produced more complicated risks and it became apparent that there
was a need for more classifications than fire insurers had used previously. From 1829 the fire
office managers in Scotland met regularly to discuss these problems and the English offices
soon followed their example. A fuller agreement was reached after the Tooley Street fire and
this resulted in the founding of the Fire Offices’ Committee in 1868 where matters of
common interest were discussed.
Over the years the term “fire” has become more accurately defined and the fire policy agreed
by members of the Fire Offices’ Committee (still called the “standard fire policy”) has been
widened to include lightning and explosion, with actual fire resulting. The policy may also be
extended for an additional premium to include such risks as earthquake, storm or flood,
bursting of water pipes or tanks, impact by vehicles or damage caused by aircraft or aerial
devices.
MEANING OF FIRE INSURANCE
The term fire in a fire insurance is interpreted in the literaland popular sense. There is fire
when something burns. Inother words fire means visible flames or actual ignition.Simmering/
smoldering is not considered fire in FireInsurance. Fire produces heat and light but either of
themalone is not fire. Lightening is not a fire but if it ignitessomething, the damage may be
due to fire.Under section 2(6A) Insurance Act 1938, the fire insurancebusiness is defined as
follows: “Fire insurance business meansthe business of effecting, otherwise than
independently tosome other class of business, contracts of insurance againstloss by or
incidental to fire or other occurrence customarilyincluded among the risks insured against in
fire insurancepolicies”.Example: The following are the items which can be burnt/damaged
through fire:
Buildings
Electrical installation in buildings
Contents of buildings such as machinery, plant andequipments, accessories, etc.
Goods (raw materials, in–process, semi–finished, finished,packing materials, etc.) in
factories, godowns etc..Goods in the openFurniture, fixture and fittings
Pipelines (including contents) located inside or outsidethe compound, etc.The owner of
abovementioned properties can insure againstfire damage through fire insurance policy which
provides financial protection for property against loss or damage by fire.
FEATURES OF FIRE INSURANCE
1) Offer & Acceptance : It is a prerequisite to any contract.Similarly, the property will be
insured under fire insurancepolicy after the offer is accepted by the insurancecompany.
Example: A proposal submitted to the insurancecompany along with premium on 1/1/2011
but theinsurance company accepted the proposal on 15/1/2011.The risk is covered from
15/1/2011 and any loss prior tothis date will not be covered under fire insurance.
2) Payment of Premium: An owner must ensure that thepremium is paid well in advance so
that the risk can becovered. If the payment is made through cheque and it isdishonored then
the coverage of risk will not exist. It is asper section 64VB of Insurance Act 1938.
3) Contract of Indemnity: Fire insurance is a contract ofindemnity and the insurance
company is liable only tothe extent of actual loss suffered. If there is no loss, thereis no
liability even if there is fire. Example: If the propertyis insured for Rs 20 lakhs under fire
insurance and it isdamaged by fire to the extent of Rs. 10 lakhs, then theinsurance
company will not pay more than Rs. 10 lakhs.
4) Utmost Good Faith: The property owner must discloseall the relevant information to
the insurance companywhile insuring their property. The fire policy shall bevoidable in
the event of misrepresentation, mis-descriptionor non-disclosure of any material information.
Example:The use of building must be disclosed i.e whether thebuilding is used for
residential use or manufacturing use,as in both the cases the premium rate will vary.
5) Insurable Interest: The fire insurance will be valid only ifthe person who is insuring the
property is owner or havinginsurable interest in that property. Such interest mustexist at
the time when loss occurs. It is well known that insurable interest exists not only with the
ownership butalso as a tenant or bailee or financier. Banks can alsohave the insurable
interest. Example: Mr. A is the ownerof the building. He insured that building and later
onsold the building to Mr. B and the fire took place in thebuilding. Mr. B will not get the
compensation from theinsurance company because he has not taken theinsurance
policy being a owner of the property. Afterselling to Mr. B, Mr. A has no insurable
interest in theproperty.
6) Contribution: If a person insured his property with twoinsurance companies, then in
case of fire loss both theinsurance companies will pay the loss to the
ownerproportionately. Example: A property worth Rs. 50 lakhswas insured with two
Insurance companies A and B. Incase of loss, both insurance companies will
contributeequally.
7) Period of fire Insurance: The period of insurance is to bedefined in the policy. Generally
the period of fire insurancewill not exceed by one year. The period can be less thanone year
but not more than one year except for theresidential houses which can be insured for
the periodexceeding one year also.
8) Deliberate Act: If a property is damaged or loss occursdue to fire because of
deliberate act of the owner, thenthat damage or loss will not be covered under the
policy.9) Claims: To get the compensation under fire insurancethe owner must
inform the insurance companyimmediately so that the insurance company can
takenecessary steps to determine the loss.
1. Valued Policy
The value of the property to be insured is determined at the inception of the policy.
In this case;
The insurer pays the total admitted value irrespective of the then market value of the
properties. The measure of indemnity is, in consequence, not value at the time of the fire, but
a value agreed upon the inception of the policy.
The insurer pays the insured a fixed sum following the destruction of the insured property.
The amount fixed may be greater or less than the actual market value of the property
destroyed by fire at the time of loss. In this policy, the measure of indemnity is based on the
value of properties rather than on the market values of the property destroyed.
This policy is used for insuring especially pictures, sculptures, works of art, jewelry, rare
things, articles of everyday use.
Since the value of damage of these articles cannot be easily determined at the time of loss, the
valued policies are commonly used.
Strictly speaking;
the valued policies are betrayal from the principle of indemnity because the market price is
not paid in this case.
The valued policy is beneficial to the insured because he is relieved of proving the value of
the property at the time of loss by searching for invoices and receipts.
The disadvantages are that the new purchases and replacement cannot be added to the valued
policy.
The valuation, therefore, is revised at frequent intervals. The insurer will have to pay more
than the actual loss if the market price of the property has gone down.
It may increase the moral hazard. There may be difficulty in settling the partial losses. The
valued policies can be disputed on the grounds of fraud.
Related: How the Principle of Contribution Works in Insurance
2. Valuable Policy
The valuable policy is that policy where the claim amount is to be determined at the market
price of the damaged property.
The amount of loss is not determined at the time of commencement of risk but is determined
at the time and place of loss. This policy is truly representing the doctrine of indemnity.
3. Specific Policy
Where a specific sum is insured upon a specified property in case of a specified period, the
whole of the actual loss is payable provided it does not exceed the insured amount.
Here the value of the property insured has no relevance in arriving at the measure of
indemnity in a specified policy and the insured sum sets a limit up to which the loss can be
made good.
4. Floating Policy
The floating policy is the policy taken to cover one or more kinds of goods at one time under
one sum assured for one premium and about the same owner.
This policy is useful to cover fluctuating stocks in different localities.
Since the properties are spread over various localities and in different forms, the physical and
moral hazards are also varying and, therefore, it makes difficult to determine premium rates.
In India, the premium rate is approximately the same in such cases except for the case of the
most hazardous risk.
Such policies are specially taken by big manufacturers or traders whose merchandise might
be lying in parts of the warehouse, port, or railway station.
In such cases, it is very difficult for the owner of such goods to take a specified policy for
each good because the quantities of the goods deposited in each will fluctuate from day to
day, place to place, according to sales or consumption or consequent removal and
replacement.
The average rate of premium is ascertained by taking into account the total premium payable
had the property been insured by specific policies.
The floating policy contains the ‘average’ and ‘marine’ clauses. The policy is taken only on
stocks. The policy cannot be issued in respect of the immovable property.
The address of each warehouse has to be declared by the insured. Unspecified locations
cannot be covered. The entire complex is under the control of the insured. There is an extra
premium for additional risks.
Related: 7 Types of Insurance
5. Average Policy
The policy is containing an ‘average clause’ called an Average Policy. The amount of
indemnity is determined concerning the value of the property insured.
If the policyholder has taken a policy for a lesser amount than the actual value of the
property, the insured will be deemed to be his insurer for the amount of under-insurance.
The insurer will pay only such proportion of the actual loss as his insurance amount bears to
the actual value of the property at the time of loss.
For example;
the property worth $30,000 is insured for $20,000 is damaged up to $12,000, the insurer will
pay only Rs. 8,000 as is evident from the following:
Claim = Insured amount / value of property X actual loss
The insured, thus, will suffer him up to $4,000 and the insurer will pay only $8,000 out of Rs.
12,000. In this case, if the insurance were taken up to the full value of the property, the
assured would have been paid all the financial loss, i.e., $12,000. Since the insurance was
taken for lesser than the actual value of the property, the assured is compensated for the loss
in that proportion.
The average clause is operative only in the case of under-insurance. This clause is ineffective
when the property is insured for the full value as in that case the insured is protected to the
extent of his total loss.
The under-insurance penalizes the assured by inserting ‘average clause’ to the policy because
he is supposed to insure himself for the amount by which he under-insures his property and,
Therefore;
It supposed to contribute in that ratio to the loss sustained.
The average clause is accompanied, sometimes, with the co-insurance clause which is
discussed in the next chapter.
6. Excess Policy
Sometimes, the stock of a businessman may fluctuate from time to time, and he may be
unable to take one policy or a specific policy.
If he takes a policy for a higher amount, he has to pay a higher premium.
On the other hand;
if he takes insurance for a lower amount, he will have to bear the proportionate amount of
loss.
The insured in this case can purchase two policies, one ‘First Loss Policy” and the second,
‘excess policy.’ The ‘First Loss Policy’ will cover that stock below which the stock never
goes.
The minimum level of stock can be found out from the experience and for the other portion
of stock which exceeds the minimum limit; he can purchase another policy called ‘excess
policy’.
The actual value of the excess stock is declared every month. The amount of premium is
calculated on the average monthly excess amount.
Since the chances of payment on the excess amount are very remote, the rate of premium is
also very nominal.
Thus;
The insured will pay a very nominal premium as compared to the premium payable on the
total amount had the policy been a specific one. The average .clause also applies to this
policy.
7. Declaration Policy
The excess policy contributes to only a rateable proportion of the loss because if the amount
of excess stock exceeds the sum set in the excess policy, the businessman will not have a full
cover owing to the average condition.
Moreover, if the First Loss Policy was also subject to an average condition, the assured will
be at a loss. The declaration policy will give better protection in such cases where the stock
fluctuates from time to time.
Under the declaration policy, the insured takes out insurance for the maximum amount that
he considers would be at risk during the period of the policy.
On a fixed date of every month or a specific period, the insured furnishes a declaration of the
amount. The premium is provisionally paid to 75% of the annual premium amount.
Practically;
the annual premium is determined on the average of these declarations; If the premium is
higher than the provisional premium already paid, the insured has to pay the difference to the
insurer.
On the other hand, if the premium so calculated is lesser than the premium already paid, the
excess is returned to the policyholder.
The declaration must be made on a specified day or within the next 14 days. Otherwise, the
sum insured will be deemed to be the declared value. The policy applies only to stocks and
the sole property of the insured.
The great advantage of this policy is that the premium is limited to the actual amount at risk
irrespective of the sum insured. Unlike the excess policy, the premium is not unnecessarily
paid.
Moreover;
the insurer may pay up to the sum insured throughout the policy because the premium
amount can be adjusted accordingly.
The value of risks is an average of each day of the month or the highest value at risk during
the month. Declaration policy is not available for a short period stock in process, stock at
Railway siding.
Premium is adjusted at the expiry of the policy. The policy is very advantageous to those
businessmen whose stocks fluctuate from time to time.
The amount of the declaration offers scope for fraud because the insured may pay a lesser
premium by undervaluing the stock. Therefore, this policy is issued only to reputed concerns.
Related: Principle of Indemnity: Definition and How it Works in Insurance
8. Adjustable Policy
The above disadvantage is removed by an adjustable policy. This policy is nothing but an
ordinary policy on the stock of the businessman with the liberty to the insured to vary in his
opinion; the premium is adjustable pro-rata according to the variation of the stock.
In the case of declaration policy, since the excess premium is refundable at the end of the
year, the insured may put fire to the property.
This danger is avoidable in an ‘Adjustable Policy’. This is issued for a definite term on the
existing stock.
The premium is calculated frequently and is paid in full at the inception of the policy.
Whenever there is variation in the stock, the insured informs the insurer. As soon as the
information of variation is received, the policy is suitably endorsed and, the premium is
adjusted on a pro-rata basis.
The policy amount will, thus, be changeable from time to time. The premium is also settled
accordingly.
Difference between Declaration and Adjustable Policies
In case of declaration policy, the insurer’s liability is the insured amount, but in the case of an
adjustable policy, the insurer’s liability is the value of the last declaration made.
The periodical declarations have no direct bearing on the measurement of indemnity in case
of declaration policy, but these have been the basis of measurement of indemnity.
The advantage of the declaration policy over the adjustable policy is that in the former a
margin of safety is present because the maximum amount insured is always at risk, but in the
latter case, The cover is always for the declared value.
The declaration is, the case of declaration policy is meant only for ascertaining the average of
the actual cover given throughout the year to arrive at the figure to which the actual premium
will be calculated, but in the case of adjustable policy, the declaration is the basis of policy
amount adjusted by endorsement.
The drawback of this policy is that the insured will have to deposit 75 percent of the premium
fixed for the maximum coverage in the beginning although a portion of it is found more than
the actual premium required for the full coverage, which will be returned at the end of the
year.
In the case of adjustable policy, the premium is adjusted from time to time according to the
variation of the risk and the liability of the insurer.
9. Maximum Value of Discount Policy
Under this policy, no declaration or adjustment of policy is required, but the policy is taken
for a maximum amount, and the full premium is paid thereon.
At the end of the year, in the case of no loss, one-third of the premium paid is returned to the
policyholder.
This policy is similar to the declaration policy where botheration of checking and recording
declarations is avoided.
It serves as a rough and ready method of coverage for the maximum amount. This policy is
not issued on all types of commodities and is confined only to selected commodities.
10. Reinstatement Policy
This policy is issued to avoid the conflict of indemnity, in other types of policies only the
market value of the damage or loss is indemnified but, this policy undertakes to reinstate the
insured property loss by fire to new condition irrespective of its value at the time of loss.
In other types of policies, in the case of building or machinery, the actual loss is arrived at by
deducting the regular depreciation from the original cost of it. The amount of indemnity will
be lesser than the amount to be spent in reinstating the property destroyed or damaged.
To provide full coverage, ‘reinstatement or replacement’ policies are issued.
Under this policy, the basis of settlement in the event of destruction is the cost of rebuilding
the premises, or in the case of plant and machinery, the placement is done by similar
machinery.
The reinstatement of the damaged property indicates the meaning of repair of the damages.
The restoration of the damaged portion of the property to a condition substantially the same
as but not better or more extensive than its condition, at the time of its renovation.
The cost of the property when partially destroyed will not be more than the cost which would
have been insured if such property has been destroyed.
The payment of the actual expenditure on the replacement will not be made until the
expenditure has been incurred. This policy is also called ‘New for Old’ policy because the old
property is replaced by new properties.
However, such policies are issued only on a building, plant, and machinery. This policy is not
issued on the stock, merchandise or materials.
Each item of the insured property is subject to average. The policy provides a definite amount
in case of purchase of new property in place of the old property destroyed.
The reinstatement Policy stipulates that reinstatement must be carried out by the insured to
obtain the special basis of the settlement agreed.
The reinstatement must be commenced raid carried out with reasonable dispatch and in any
case, must be completed within 12 months after the destruction or damage, or until
reinstatement carried out and expenditure incurred, the liability under the policy remains on
the normal indemnity basis.
The insurance by this policy intends to include such additional cost of reinstatement as may
be incurred solely because of the necessity to comply with the building, etc. by any Act of
Parliament, Municipal or Local Authority.
No additional premium is charged for the purpose. This policy does not cover any destruction
or damage occurring before the granting of this extension.
Related: Insurable Interest: Definition Types, Example (Explained)
11. Comprehensive Policy
This policy undertakes full protection not only against the risk of fire but combining within
the risk against burglary, riot, civil commotion, theft, damage from the past, lightning. The
policy is also termed as ‘All in policies’.
Here the ‘Comprehensive’ does not mean that every type of risk is covered. There may be
many exclusions and limitations.
This policy is beneficial to the insured and the insurer. The insurer can get a higher premium,
and the assured is protected against losses due to several specified perils.
12. Consequential Loss Policy
The fire insurance is originally purchased to indemnify the material loss only. The intangible
interest was not indemnified. This provided a check on the insured to exercise greater care
concerning the property.
However, the settlement of a loss covering material damage only was not sufficient. The
consequential loss was also to be provided. Thus, the consequential loss policy includes the
loss of tangible and intangible properties.
Thus, this policy provides an indemnity to the insured for loss of net profits, payment of
standing charges and expenditure in respect of the increased cost of working.
As a consequence of fire, there is a reduction in the volume of business which in its turn leads
to a reduction in the net profit which the lost business would have ordinarily contributed and
to an increase in the proportion of the standing barges such as rents, rates, salaries and others
to the total business done.
Thus, the policy is to indemnify the insured against financial loss which he may sustain due
to the interruption of his business following a fire.
Previously;
the measure of indemnity was a specified percentage of the amount payable under an
ordinary fire policy in respect of a material loss.
The insurer, thus, used to pay the amount of loss and a specified percentage of the loss.
However, now, the measure of indemnity is changed because the specified percentage cannot
be the true estimation of the intangible loss.
So, the resultant loss is calculated by estimating figures of loss of profits based on a reduction
in turnover or output and secondly, increased cost of working in maintaining the business on
its pre-fire level.
13. Sprinkler Leakage Policies
This policy insures the destruction of or damage to by water accidentally discharged or
leaking from automatic sprinkler installation in the insured premises.
However,
The discharge or leakage of water due to heat caused by fire, repair or alteration of building
nr sprinkler installation, earthquake, war, explosion are not covered by this policy.
14. Add on Covers Policy
An insured may like to cover his property against to delete some of the exclusions. The cover
in respect of these perils is provided by the insurer by charging an additional premium.
This additional cover is effected by either deletion of some of the excluded perils or the
addition of other specified perils.
The perils which are covered by an endorsement of the basic fire policy are collectively
called Add-on Covers. For example, earthquake damage is added to the fire policy. There are
certain principles to add to covers. It is an extension of the basic standard fire policy. The
liability shall in no case under the extension of the policy exceed the sum insured of the
policy. All the conditions of the basic fire policy shall apply to the insurance granted by
extension. Add on the cover is mid-term inclusion but the annual premium has to be charged
and not short period premium. If the insured requests for the add on the cover to be canceled
midterm the no refund of premiums for the cancellation will be allowed unless the entire
policy is canceled.
15. Escalation Policy
This insurance allows an automatic regular increase in the sum insured throughout the policy
in return for an additional premium to be paid in advance.There are certain conditions for
escalation insurance. The escalation of the policy amount shall not be more than 25 percent of
the sum assured.The additional premium payable in advance will be at 50% of the full rate.
This policy applies to policies covering building, Machinery, and accessories only and will
not apply to policies covering the stock. The clause cannot be opted for during the currency
of the policy but only at inception or renewal.The effect of this policy/clause is to provide for
a daily increase in the sum assumed based on the percentage selected spread throughout the
policy;It also allows an automatic regular increase up to 25% of the sum insured throughout
the policy in return for an additional premium to be paid in advance.
