LECTURE ON ADVANCED FIRE INSURANCE

We shall begin our studies on Fire Insurance by looking at the scope of the Standard Fire
Policy, Excluded Perils, Excluded Properties and other related conditions.

THE SCOPE OF THE STANDARD FIRE POLICY

The Standard Fire Policy covers

a) Fire
b) Lightning
c) Limited or Domestic Explosion.

A. FIRE

By the use of the word fire, it is meant that

i. there must be actual ignition

ii. there must be something on fire which ought not to be on fire
iii. as far as the insured is concerned, the loss must be fortuitous.

However, certain losses which may seem as fire losses will be excluded. Such categories
of losses are as follows:

i. damage caused by explosion resulting from fire

ii. damage to any item caused by its own ignition, leakage of electricity, short
circuiting, overheating etc.
iii. damage to an item caused by its own spontaneous fermentation or heating.
iv. damage caused by it undergoing any process involving the application of heat.
v. Damage caused by earthquake or underground fire.

B. LIGHTNING

All damages caused by lightning strike with or without fire are covered. E.g. Cracks in
walls, burnout of electrical and other fittings.

C. LIMITED OR DOMESTIC EXPLOSION

This covers
i. explosion of boilers used for domestic purposes
ii. explosion of gas in a building not being part of any gas works which is used
for domestic purposes or used for lighting or heating the building.

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OTHER INSURABLE PERILS

Besides the scope granted by the Standard Fire Policy, the policy could also be extended
to cover the following perils:

IMPACT

This covers impact to the insured’s property by road vehicles and animals. Threats from
other non-road vehicles such as fork lifts, trucks, carts etc. also exist and should be taken
into consideration.

AIRCRAFT

The cover includes damage to property by an aircraft or an aircraft part or component or

articles dropped therefrom. It must be stated that by the use of the aircraft cover, satellites
and other aerial devices are also included.

EXPLOSION

Explosion from industrial and other commercial risks is the subject of this cover. It
normally arises from chemical reactions which suddenly produce expanding gases
leading to explosion. It must be stated that explosion of steam and other pressure vessels
is excluded under this policy since they are in the domain of Engineering Insurance.
Similarly, explosion arising from pressure waves from sonic or supersonic aircrafts are
also excluded under this explosion extension.

WINDSTORM/HAILSTORM/TORNADO/HURRICANE

This term is used to reflect atmospheric disturbances involving either rain, wind, snow,
hail or any combination of them. Damage to buildings and their contents as a result
atmospheric disturbances are covered. However, damage arising from normal weathering
over a period of time is not recoverable.

ESCAPE OF WATER FROM WATER TANKS

Escape of water as a result of bursting or overflow of water tanks and apparatus are
covered under this contingency. It must be stated that sprinkler leakage is not covered
under this contingency.

FLOOD

The term flood is used to refer to escape of water from its natural confines as a result of
overflowing which may have been caused by some torrential rain. The inundation of such
water bodies or courses leading to damages are covered. Flood and windstorm damages
are usually subject to excesses.

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EARTHQUAKE

This peril covers:

i. damage caused by earthquake (without fire)

ii. fire damage caused by earthquake
iii. fire damage caused by underground fire.

RIOTS AND MALICIOUS DAMAGE

In Field vs. Metropolitan Police Receiver (1907), Riot was defined as

i. there must be at least three(3) people present

ii. there must be a common purpose, whether lawful or unlawful
iii. there must be execution or inception of that common purpose
iv. there must be the intention to mutually assist one another by force if necessary
in the execution of the common purpose.
v. There must be a display of force or violence in such a manner as to alarm at
least one person of reasonable firmness and courage.
Thus where losses arise as a result of riotous activities, the policy pays for the loss.

POLICY CONDITIONS

The major policy conditions that we shall be looking at include the following:

MISREPRESENTATION/MISDESCRIPTION

Where the insured willfully or otherwise misrepresents any information or wrongfully

describes the property under insurance, in the event of a loss, the insurer may be entitled
to the right to repudiate the claim.

ALTERATION OF RISK

Risks are put on the books of insurers in a particular state or condition at the time of
inception. Based on that, premium rates and other special conditions are imposed.

Insurers therefore require that where the insured wants to carry out any alteration in the
original risk, they should be informed or else the policy becomes voidable. Alteration
may arise
i. by removal
ii. where the risk of destruction or damage is increased or
iii. where the insured’s interest ceases except by will or operation of law.

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EXCLUSIONS

The fire policy normally excludes

i. damage by explosion , radioactive contamination, goods held in trust or

commissions and importantly monies, securities, stamps, manuscripts,
business books, computer system records, patterns, models, moulds, plans
and designs unless specially mentioned as insured in the policy.
ii. properties insured by marine policies are also excluded.

CLAIMS

This clause sets out the procedure to be followed in the event of a claim.
Namely

i. the claim must be notified to insurers immediately in writing

ii. a statement of claim should to be served on the insurers within thirty (30)
days of loss
iii. all reasonable proof and information should be provided.

FRAUD

All benefits under the policy would be forfeited if

i. the claim is in anyway fraudulent including over-valuation with the intent to

defraud
ii. any fraudulent means or devices are used to obtain any benefit under the
policy
iii. any willful destruction of the insured item by the insured or anyone acting
with his connivance.

REINSTATEMENT

The condition allows the insurer to reinstate a policy if they so wish and this condition
states the rules governing the reinstatement.

INSURERS RIGHT AFTER A FIRE

This condition allows the insurers the right of entry to keep possession of the building or
premises where the loss occurred and also to take possession of and deal with goods or
property in any reasonable manner to reduce further losses.

It must be stated that the condition allows insurers or their representation to enter a
premises and make enquiries concerning the origin of the loss,

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It should be noted that when insurers take advantage of these conditions, it does not mean
admission of liability.

On the other hand, if the insurers are hindered or obstructed, all benefits under the policy
are forfeited.

Abandonment of property to the insurers is not allowed. It is only the insurers who can
take that decision.

CONTRIBUTION & AVERAGE

This condition sets the tone for the other insurers of the same property to participate or
share in the payment of a loss and also states how property which are underinsured would
be settled by the application of the average condition.

SUBROGATION

This condition allows the insurer to wear the shoes of their insured and pursue other third
parties who are responsible for losses to settle for an indemnity loss.

WARRANTIES

This condition provides that a breach of a warranty permits the insurers to avoid the
policy irrespective of increase in risk. The effect of a breach of a warranty is to make the
policy voidable at the option of the insurers from the date of breach.

ARBITRATION

Where there is dispute between the insurer and the insured regarding amount and not
liability, the arbitration condition sets out the arbitration procedure.

ASSETS ALL RISK

This is a policy which covers every tangible asset of the insured except it is explicitly
stated as excluded.
On the whole, the scope of cover is

i. all insurable perils insured under the fire and additional perils policy
ii. accidental damage to properties
iii. theft of properties

As has been stated previously, unless an item or a peril is specifically excluded, a loss
would be recoverable.

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In effect, the scope of cover is very wide and a lot of care is needed in underwriting risks
of this nature both in terms of the type of property and the perils that face it.

CONSEQUENTIAL LOSS OR BUSINESS INTERRUPTION INSURANCE

Generally speaking, property or fire insurances do not cover consequential losses

following a fire loss. However, in modern day business, when businesses are affected by
insured perils, it is normal to take policies which will cater for the after-effects of the
loss.

The business interruption policy is to indemnify the insured in respect of loss of gross
profit which he might have suffered following a loss situation in addition to additional
costs of working expenses which he might have incurred in mitigating the after-effects of
the loss and also resuming production with a minimal delay.

Underwriting of this risk requires a careful look at both the physical risk i.e. the material
damage and the interruption risk which would to a very large extent influence the
indemnity period which is the period during which the business results are affected due to
a damage beginning with the date of the damage and ending no later than the maximum
indemnity period.

TYPES OF PROPERTIES INSURED UNDER FIRE INSURANCE

1. Buildings including landlord fixtures and fittings. There should be a description of

the walls, roof and floor of the building as well as where the building is situated.
2. Plant and machinery and all other contents. It should be explained that the all
other content clause is meant to include

i. documents, manuscripts and business books

ii. computer system records
iii. patterns, moulds, models, plans and designs
iv. pedal cycles, tools and other personal items belonging to the insured or
employees
v. rare books or works of art but there is a limit per any one article.
3. Stock and materials in trade belonging to the insured or held by him in trust or on
commission.

The use of the word stock may include

i. raw materials
ii. work in progress or partly manufactured goods
iii. bought-in components
iv. specialist packaging to protect finished goods in transit to customers
v. the finished goods

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 It is appropriate that the proper stock description along the lines mentioned above be
given.

Besides the above stated properties that are insured under fire, there may be other
miscellaneous properties which could be also insured under fire insurance.

ADDITIONAL INSURABLE ITEMS

In reinstating buildings and or plant and machinery, there are some other costs which
surface and are therefore insurable. Some of these are

1. Architects, Surveyors, Engineers, Solicitors Fees etc.

In preparing drawings, plans, specifications, layouts etc. after a fire loss, some specialist
services may be required especially where the settlement is on reinstatement basis. The
charges of these specialists may be insured headings.

2. Debris Removal Costs

When a building is to be reinstated or rebuilt on the same site where it was before the
loss, there will be the need to clear the land of debris and prepare it for the reconstruction.
The cost associated with that could be insured. It is normally a small specified percentage
of either the building or machinery cost.

3. Local Authority Cost

The cost associated with complying with local authority regulation and permits could
be the heading of an insurable item.

CLAUSES COMMONLY FOUND IN PROPERTY INSURANCES

TEMOPRARY REMOVAL CLAUSE

A fire policy covers items at a specific defined location and the insurance does not follow
any item taken from that location. However, occasionally items may be taken out for
some reasons on a temporary basis.

The temporary removal clause ensures that the insurance extends to cover the item at
whatever location it may be.

The main features of the clause are that

i. the extension does not cover stock

ii. the removal must be of a temporary nature

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 iii. the purpose of the removal must be cleaning, renovation, repair or other
similar purpose.

The cover includes the transit of the property to and from the location. The cover is
geographically defined to be within a give territory. There is usually a limit of 10% of the
Sum Insured.

The extension does not include

i. Property under contractual liability i.e. where someone has been contracted to
do the cleaning of the item.
ii. Motor vehicles licensed for road use.

It should be mentioned that documents and computer system records could also be
covered under such an extension.

THE REINSTATEMENT MEMORANDUM

Where an insured so wishes, the policy can be issued under the reinstatement
memorandum so that settlement would be on new for old basis.

When policies are such covered, the average clause will be modified so that average will
apply only when the Sum Insured of the property at the time of reinstatement is less than
85% of the value. For reinstatement clause to be applicable, the following should be
noted:

i. it should cover buildings, furniture and plant & machinery.

ii. the property insured may be replaced on another site
iii. the work of reinstatement must begin and be carried out as quickly as
possible.

INSURED VALUE AND INFLATION

There are various clauses that can cater for the effect of inflation on insured property.
Notable among them is the escalator clause, adjustable premium policy, valuation linked
scheme and “day one basis” Reinstatement.

REMOVAL OF DEBRIS CLAUSE

The cost of demolishing, clearing and removal of the debris could be covered under the
policy by extension. There is always a limit to the amount that could be paid. This is
usually a flat amount which should reflect the sums insured.

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STOCK INSURANCE AND VALUES AT RISK

Stock insurances are normally arranged on indemnity basis. However, by the very nature
of stock, no one
particular value of stock can be said to be existing throughout the whole year. Rather, the
stock values keep fluctuating from time to time. The value increases when stock is
brought in and decreases when stock is taken out either for consumption, in the
manufacturing process or for sale.

Arranging adequate insurance therefore becomes a little difficult as the stock level may
be too low for the Sum Insured at one time or too may be too high for the Sum Insured at
another time.

A way around this is to insure the stock on declaration basis. A Sum Insured is chosen
which should represent the maximum sum or stock level that is likely to be at risk in the
course of the year. A provisional premium is calculated on 75% of the stock value.

The insured undertakes to agree to declare the stock holdings on periodic basis be it
monthly, bi-monthly or quarterly. At the end of the year, the total amount declared is
computed and an average declaration is determined upon which the annual premium is
computed. If the premium obtained based on the average declaration is higher than the
provisional premium, an additional premium is charged and if lower, a return premium is
given.

FIRST LOSS INSURANCE

First Loss insurances are arrangements where inspite of the values at risk, an insured with
the consent of the insurer, agrees to insure the property for less than the value at risk.

The value of the property at risk is referred to as the declared value and the first loss
amount which is always lower than the declared value is the Sum Insured under the
declared policy.

To effectively arrive at the Sum Insured which is also the first loss amount, the insured
should properly assess the EML of the risk based on which he fixes the first loss amount.

If the EML is wrongly assessed and therefore exposes the property at risk, the insurer will
limit himself to only the first loss amount. Though the scheme allows for an insured value
less than the value at risk, there is a kind of an average clause which penalizes the insured
in the event where the declared value is lower than the value at risk.

The claim payable will therefore be expressed as:

Declared Value X Loss

Value at Risk