Fire Insurance

What are insurance companies insuring

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Characteristics of a Fire Insurance Every Insured Should Take Care of
• A fire insurance is a contract between a
policyholder and the insurance company in which
the insurer agrees to compensate the insured in
case of loss or damage happens to a particular
property due to fire. The premium is also pre-
decided and the insurer compensates for the loss
up to the insured amount only.
• Insurable Interest – It is necessary for the insured party to
have the insurable interest in the property for which he/she
wants to buy insurance. With insurable interest, we mean, the
policyholder is benefited by the survival of the insured things
and suffers a loss in case of its destruction. Remember, the
insurable interest should exist both at the time of buying the
policy and at the time of filing a claim.
• Utmost Good Faith – A fire insurance contract is
governed by the principle of utmost good faith that says
it is necessary for the policyholder to disclose all vital
points with regard to the subject-matter of the insurance
policy so that the insurer can have a proper calculation
with regards to the risks involved. The policyholder
should give information pertaining to the environment,
construction of the house, the possibility of catching fire,
etc. The insurance company has all rights to terminate
the contract if it finds that important points are not
disclosed.
• Contract of indemnity – The insurer will settle the claim only
up to the insured limit. In case there is no loss, no claim is
applicable.
• Personal insurance contract – As a fire insurance is a
personal contract, the policyholder is involved with the
property. As a result, it is necessary that the insurance
company should have complete knowledge about the
behavior of the policyholder. Moreover, the policyholder
can’t transfer the insurance policy without the
permission of the insurer. In case the possession of goods
is transferred to a third-party, the insurer has all rights to
terminate the insurance contract.
• Personal right – The person whose name is mentioned in the fire
insurance contract as the policyholder is eligible to receive the
insured amount in case of any loss or damage.

• Direct loss – As it is a fire insurance, the fire should be the direct and
immediate cause of the loss or damage.

• Description of property – It is an important part of the insurance

contract, which says that the location of the property should be
mentioned in the policy document. Moreover, at the time of claim,
the insurer will settle the claim only when the accident happened at
the insured place. In the case of any change in the location, it is
necessary to inform the insurance company.
• Case: 1
• Mr. Jayant Sinha bought a fire insurance policy to insure
his goods worth Rs 50 lakhs. Last month, a fire erupted at
his place and engulfed goods worth Rs 20 lakhs. The
insured reported a loss on account of fire to the
insurance company. However, upon inspection, it was
found that the address where the fire had occurred was
different than the address mentioned in the insurance
policy document.

• The insurer turned down the claim because of the

change in the location which was not communicated by
the policyholder to the insurance company.
• Case: 2
• Mr. Ram Prakash is a cloth merchant who owns five mills
in Surat and Pune. Last year, he bought a fire insurance
policy for all its mills. A few weeks ago, Ram Prakash shut
down its business in one of its mills, Prakash Mill,
situated in Pune.

• It means, Ram Prakash has also lost insurable interest in

Prakash Mill and he should inform his fire insurance
company who will either cancel his fire insurance policy
or change the address mentioned in the policy
document, in case he buys another mill and wants to
ensure it. In this case, the person who has bought the
mill from Ram Prakash should buy the fire insurance
policy.
• Video
• IC 11 Chapter 3
• United India Insurance
 Fire insurance Features
• Location based in the most important factor of fire insurance.
• So that it can be verified and checked
• Assets that are insured are classified as Fixed assets and Rolling assets
• Fixed assets are classified as BMA
Building, Plant & Machinery and Other Assets (Furniture Fixtures and Fittings)
FFF
• FFF – Computer , Stationary etc which are not a part of business.
• Rolling assets ( Raw Materials, Work in progress and Finished good).
• Raw Materials and Finished good are separate and work in progress is very
small component.
•
 Perils of Fire Insurance:
Insurance covers very specific perils

• Social
Fire, Riots Strikes Malicious Damages (RSMD)
• Naturals
Lighting, (STFI) Storm Tempest Flood Inundation (Cyclones, Typhoons) ,
Landslide & Subsidence.
• Others
Explosion and Implosion, Bursting and Overflowing of water tanks & pipes,
Missile testing, Aircraft damage, Bush Fires, Impact Damage.

Boilers and pressure vessels are not converged, these need be taken
separately.
Bush Fires ( dry grass catch fire because of heat)
 Fire Insurance Exclusions
• Exclusions
Excess ( Deductible 5% of the claim amount or Rs 20,000 or Rs10,000
depends on property) not payable.
• War ( not location based) and Nuclear risks
• Pollution / Contamination ( Property damage is covered) (As something
burning causes contamination is not covered as it is liability insurance)
• Valuables ( Small Amount), Explosives ( require prior approval , because of
explosive act. Great risk)
• Electrical Fires ( Accidental fire, Electrical Short circuit is not covered, but
fire, caused damage are covered), Temp change damage ( not covered)
 Principles
• Common
Utmost good faith, Change in risk ( Office is now godown, Cancellation
(insurer or insured), Fraud ( if detected than cancelled) , Average (under
insurance, SI/(total value)), Contribution ( Two fire insurance will share the
loses in proportion) Subrogation(Insurance company will pay and them
recover for neighbour). Arbitration, Written communication.
• Specific
Fall/Displacement ( If one part of building as fallen and made your property
has become week. It need to be informed), Possession ( can take possession
of damaged property if they feel insured is not protecting the subject matter,
till it is settled, so that loss is not aggravated), Reinstate or replace, automatic
reinstatement of SI
 Fire insurance add-ons
• Debris Removal (3% of SI to 7%)
• Escalation, Loss of rent
• Earthquake, Terrorism, impact damage
• Spontaneous combustion, Cold storage stocks
• Temporary Removal stocks
• Forest fire
 Types of Policy
• Depreciated value ( Market Value – Depreciation for usage)
• Reinstatement Value (RIV) for BMA (Fixed Assets)
• Stocks
Floater ( as the business is in multiple location , all put together a value is
informed)
Declaration ( Monthly declaration about the value of stock and based on
this SI is calculated)
• Industrial All Risks (IAR)
• Fire & Burglary, Machinery breakdown (MB), Business Interruption (fire)(
Fixed cost for with profit is reduced)
Car