Fire Insurance

Fundamentals…
 History and definition
• Origin of fire insurance -16th century in Germany
• The word ‘fire insurance business’ has been
added in the year 1950 by introducing sections
2(6A) and 2(6B)
• Sec. (6A) "fire insurance business" means the
business of effecting, otherwise than incidentally
to some other class of insurance business,
contracts of insurance against loss by or
incidental to fire or other occurrence customarily
included among the risks insured against in fire
insurance Policies;
• Sec. (6B) "general insurance business" means
fire, marine or miscellaneous insurance
business, whether carried on singly or in
combination with one or more of them;
 Applicable Principles….
• In the absence of codified law on the subject,
enlarged much by judicial decisions
• Contracts of indemnity, therefore, following
corollary principles shall be applicable:-
• Insurable Interest
• The principle of Good Faith
• The principle of indemnity
• Proximate Cause
• The doctrine of Subrogation
• Warranties
 Principle of Indemnity
• Depends upon the policy
• The insurers undertake to make good the
insured’s loss by monetary payment or by
reinstatement or replacement so that the
insured shall be fully indemnified, but this is
subject to the sum insured
• Generally sets an upper limit up to which the loss
can be indemnified
• The actual amount of indemnity will be the
market value of the subject- matter destroyed or
damaged by fire
 Cond.
• Interpretation of Indemnity-
• Previously- ‘indemnity’ was understood in the
sense of material indemnity only, i.e., tangible
and material property only
• Now-Extended to cover the ‘consequential
loss’, profits on account of cessation of sales,
salaries, taxes, rent, rates, etc., are also
indemnified
• A measure of indemnity varies with the type
of property.
 Insurable Interest
• Fire Insurance contract without insurable interest
would amounts to gambling transaction
• Subject-matter should be in such a position that
the insured may suffer loss at the time of damage
and may gain by its protection
• Must be present at the time of contract and
continue throughout till the subsisting of the
contract (does not exceed generally more than
one year) or the time of loss
• Policy amount-cannot be assigned to others
freely in fire insurance
 Conditions to Constitute an Insurable Interest
• There should be a physical object capable of
being damaged or destroyed by fire
• The object must be the subject matter of
insurance
• The insured must stand in such relationship as
recognized by law where the insured is benefited
by the safety of the subject-matter or be
prejudiced by its loss
• The insurable interest is the ‘pecuniary interest’.
The fire insurance is a personal contract, so, the
transfer of interest would invalidate the contract
 The following persons….
• 1. Owner of the property-legal owner or the
equitable owner. The owner may be a single
or joint, holder. The partial owner can take
policy for full value as trustee of all the
property
• 2. An agent has an insurable interest in the
property of his principal
• 3. A partner has an equitable interest in the
firm’s property
• 4. A creditor has an insurable interest in a
property on which he has a lien for the debt
 Cond.
• 5. An insurer has it in respect of risks
underwritten by him for the purpose of
reinsurance
• 6. Mortgaged-The mortgagor has an insurable
interest in the full value thereof and the
mortgagee has an insurable interest in respect
of any sum due to become due under the
mortgage
• 7. A bailee can insure any article or property
bailed, He may be a gratuitous bailee or bailee
for reward
• A trustee has an insurable interest in the
property put on trusteeship
 Cond.
• Macaura v. Northern Assurance co Ltd
• It is not confined to mere ownership, it
includes every kind of interest that may
subsist in or be dependent upon an object
exposed to the risks contemplated under a fire
insurance policy Ex. Purchaser, tenant,
beneficiary, bailee, finder of goods etc.
 Principle of Utmost Good Faith
• The observance of the utmost good faith by both
the parties are of vital significance
• Two Aspects-firstly, the disclosure of material
facts and secondly, preservation of the property
insured
• 1st Phase-The assured is required to disclose all
the material information which are known to him
although it was not asked by the insurer
• 2nd Phase-The observance of good faith is
necessary not only during the negotiations of the
contract but throughout the term of the policy
and in making claims. Any change after the
commencement of risk must be communicated to
the insurer
Exceptions to Principles of Good Faith
• All those circumstances which diminish the risk.
• All those facts which are known or reasonably
presumed to be known to the insurer.
• Information which is of common knowledge.
• Those facts which the insurer in the ordinary
course of his business ought to know or which
the
• insurer ought reasonably to have inferred from
the details given.
• Those facts which are superfluous to disclose by
reason of a condition or warranty.
 Doctrine of Subrogation
• The damaged property has any value left or the
assured can recover the lost property or has any
right against a third party regarding that property.
These must pass on to the insurer.
• Warranties in Fire Insurance
• Warranty is that by which the assured undertakes
that some particular thing shall or shall not be
done, or that some conditions shall be fulfilled or
whereby he affirms or negatives the existence of
a particular state of facts.
• Warranties which are mentioned in the policy are
called express warranties and those warranties
which are not mentioned in the policy are called
implied warranties.
 Formation of contract
• An offer to enter into a contract of insurance
usually comes from the proposer. The insurer
may accept or reject it or may offer to accept
it subject to certain conditions. This
constitutes counter-offer.
• Issue of cover note constitutes acceptance on
the part of the insurer. The cover note is
eventually replaced by a policy.
• According to Sec-64VB of insurance Act, 1938
as amended, the contract does not come into
existence unless premium is paid.
 Contd.
• The risk is assumed from the date of payment
of premium. Payment by cheque is valid
subject to realisation.
• Geisman v Sun Alliance and London Ins. Ltd
• It was held that, goods though legally
purchased abroad, are smuggled into the
country without disclosure to the customs
authorities, an insurable interest does not
exist.
 Procedure to Insure
• For insuring any property under the fire
insurance policy,
• 1) Filling of proposal form
• 2) Inspection of the property
• 3) Payment of premium
• 4) Issue of Cover note/ Policy document in lieu
of acceptance of the proposal.
 Proposal form
• The fire proposal includes the following information :
• Description of the property. This would include:
• (i) Construction of external walls and roof, number of
storeys.
• (ii) Occupation of each portion of the building.
• (iii) Presence of hazardous goods.
• (iv) Process of manufacture.
• (v) The sums proposed for insurance.
• (vi) The period of insurance.
• (vii) History of previous losses.
• (viii)Insurance history - whether previously other
insurers had declined the risk, etc.
 Contd.
• Inspection of the property: In case of property of any
business organization, whether manufacturing or other
type of organization, a risk inspection report is
submitted by the insurer’s engineers. The engineers
submit in their report the nature of risk involved in the
factory/manufacturing unit
• Payment of Premium: Based on the proposal form and
the inspection report of the engineers, the insurance
company will submit the premium rates to the
property owner and if these rates are acceptable to
him then he should pay the amount to the insurance
company.
• It is also a legal requirement under section 64VB of
Insurance Act of 1938
 Cover Note/Policy
• Issue of Cover note/ Policy document:
• On receipt of a completed proposal form and /
or inspection report, the cover note is issued,
pending preparation of the policy document.
• The cover note is an unstamped document
issued to provide evidence of cover till the
time the policy is issued.
• The cover note provides insurance against
specified perils on the usual terms and
conditions of the company’s policy.
 Cond.
• The printed policy form provides for a schedule in
which the individual details of the contract are
typed. The items are similar to those in the Cover
Note but with more detailed information.
• After issuing the policy document, it is likely that
there may be some changes in the nature of
property or sum insured may increase or
decrease.
• In this case, these changes can be incorporated
by way of endorsements which are issued to
record changes such as alteration in risk, increase
or decrease of sum insured, etc.
 Policy Covers
Lightning: Any lightning due to cloud burst may damage
the property and the same will be covered under the
fire policy.
Explosion/Implosion: Sudden change in the temperature
in any plant & machinery or exposure to atmospheric
pressure may result into loss and the same will be
covered under fire policy.
Aircraft Damage: Any damage to the property due to any
droppings by aircraft or by itself will also be covered
under the fire policy.
Riot, Strike and Malicious Damage (RSMD): Any damage
to the property due to public or strike by employees or
malicious damage (intentional damage) by any person
will be covered under this policy.
 Cond.
Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado,
Flood and Inundation (STFI):
The property damage due to any of these storms and
flood will also be covered under this policy. The
meaning of these perils lies in different intensity of the
storms. Flood not only means the leakage of water
through river but also accumulation of water due to
heavy rains in the premises.
Impact Damage: Damage to the property due to impact
by any Rail / Road vehicle or animal by direct contact,
but not belonging to or owned by the Insured or any
occupier of the premises or their employees while
acting in the course of their employment.
 Cond.
Subsidence and Landslide including Rock Slide
• Destruction or damage caused by Subsidence of part of
• the site on which the property stands or Land slide /
• Rock slide.
Bursting and/or overflowing of Water Tanks, Apparatus
and Pipes:
If due to bursting or overflowing of water from the water
tanks installed in the premises of the policyholder any
damage or loss to the property of the policyholder is
caused, it will be covered under this policy.
Missile Testing Operations:
Any loss or damage due to missile testing by the Govt. or
otherwise will be covered under this policy.
 Cond.
Leakage from Automatic Sprinkler Installations
: In most of the organizations as a fire
protection measure, automatic sprinkler
system is installed. If due to non–usage of the
sprinkler system or otherwise it starts leaking
and damages the property, then it will be
covered under the fire insurance policy.
• L. Bush Fire: It means fire spread from the
bushes (small fire) but will not include forest
fire.
 Exclusion clause
• (i) In every claim minimum deduction say Rs
5000/- or Rs 10000/- will be made while settling
the claim under this policy. It is to avoid small
losses.
• (ii) Loss, destruction or damage caused by war,
and kindred perils.
• (iii) Loss, destruction or damage directly or
indirectly caused to the insured property by
nuclear peril.
• (iv) Loss, destruction or damage caused to the
insured property by pollution or contamination.
 Contd.
v) Loss, destruction or damage to any electrical and / or
electronic machine, apparatus, fixture or fitting (excluding
fans and electrical wiring in dwellings) arising from or
occasioned by over-running, excessive pressure, short
circuiting, arcing, self-heating or leakage of electricity,
from whatever cause (lightning included).
(vi) Loss of earnings, loss by delay, loss of market or other
consequential or indirect loss or damage of any kind or
disruption whatsoever.
(vii) Earthquake: It is not covered under the fire policy but
by paying additional premium, the earthquake can be
covered.
 The policy-various types
• Standard fire policy: which generally includes
damage or loss by fire by lighting, by
explosition of boiler, by explosition of gas used
for domestic purposes
• Damage is assessed according to the value of
property at the time of fire i.e, market value of
the damaged property after deducting
depreciation, as a matter of fact, such policies
are issued on the principle of indemnity.
• Re-instatement value policies: Under this the
insurer has the option to reinstate or replace
the property or any part thereof.
 Cond.
• Such policies are issued only in respect of
building, plant, machinery, fixtures, and
fittings.
• Under these policies the claim is paid on the
basis of re instatement of the damaged
property irrespective of its market value at the
time of the fire
• The All India fire Tariff however restricts the
issue of policies on such basis to buildings,
machinery, furniture and fittings
 Memorandum
• In the event of policy being issued on ‘reinstatement
value’ basis the following memorandum is required to
incorporate:-
• “ it is here by declared and agreed that in the event of
the property insured under; within the policy being
destroyed or damaged, the basis upon which the
amount payable under the policy is to be calculated
shall be cost of replacing or reinstating on the site or
any other site with property of the same kind or type
but not superior to or more extensive than the insured
property, when new as on the date of the loss, subject
to the following special provisions and subject also to
the terms and conditions of the policy except insofar as
the same may be varied hereby”
• It is always at the option of the insurer.
 Cond.
• Valued policies: the value of the property is pre-
determined at the time of taking the policy
• In the event of loss, the claim or value is limited
to the sum assured irrespective of its market
value.
• Such policies are generally issued for pieces of
art, sculpture, and rare jeweler. These articles are
not capable of valuation of market value.
• Floating policies: are issued in respect of the
goods, where the quantity of goods fluctuate and
cannot be ascertained at the time of taking the
policy.
 Cond.
• Average policies: such policies contain a
clause known as ‘average clause’. It is
generally in such cases where the property is
insure for lesser value than the actual one.
• In the event of loss proportionate claim is
given.
• Comprehensive policy: These are known as
‘all risk policies’ because such policies not only
cover the risk of fire, but also the loss caused
by all types of risk namely riot, theft, burglary,
lightning, flood, storm etc.
 Cond.
• But however it may be noted that, such
policies do not cover all sorts of perils but it
should be specified and there are various
exclusion clauses, which excludes a particular
type of peril
• Sprinkler leakage policy: cover the risk caused
from the water by the sprinklers installed in
the factory.
• Transit policy: goods in transit by train or road
can be covered under a standard fire policy
from the time loading to till unloading.
Scope of the policy & Exclusion clauses
• Shivalik fertilizers Ltd v. United India Insurance
Co. Ltd
• The loss caused has to be judged in terms and
the conditions of the policy. If the policy does
not cover the peril complained of, the
insurance company shall be within its right to
repudiate the claim.
• The stock stored in the two godowns was
damaged due to extensive floods. The
information was given to company.
 Cond.
• The company deputed the surveyor who had
assessed the loss at Rs. 5,93,352/- but the
claim was denied on the ground that the
damage to the stock was due to flood which
was not covered under the policy.
• The question before the commission was
whether the fire policy in question included
the risk of flood.
• A reading the policy disclosed that it covered
the risk of fire, riot, strike, malicious damage
and terrorist act.
 Cond.
• The complainant's arguments were that the
words ‘other specified perils’ in the policy
included the risk of flood.
• The commission while rejecting the contention
and observed that:-
• “we are unable to see how these words in the
fire cover not would held him. The submission
Of the counsel is completely negative by the this
document itself. The premium perils in the fire
policy precedes the words ‘ Fire, R&S., Terrorist
act’. It is thus manifest that the complainant
had paid the premium for these risks only and
not for flood.
 Cond.
• Moreover, the word ‘peril’ is to be read in
conjunction with the risks mentioned in the
fire policy, which is the basic document of
insurance. The word ‘peril’ cannot be given
such a wide meaning to cover all sorts of
risks. The word ‘flood’ is however, covered by
the exclusion of the policy.”
 Cause of fire is immaterial
• Sri Balaji traders v. UII Co.Ltd,
• A fire broke out in the insured godown of the
plaintiff firm that destroyed the entire
godown and the stock kept in side the
godown.
• The claim was repudiated on the ground that
the cause of fire alleged was imaginary.
• The question before the court was, whether
disclosure of the cause of fire was necessary
for the settlement of the claim.
 Cond.
• The court referred the book ‘fire and motar
insurance’ by E.R. Hardy Ivamy where under the
heading ‘Immateriality of cause of fire’ it was
observed:
• “The object of the contract is to provide for the
payment of a sum of money, or for some
corresponding benefit, to meet a loss or
detriment which may be suffered by the insured
upon the happening of a fire.
• To carry the investigation, therefore, beyond the
cause of loss, and to cast upon the insured the
burden of establishing that the cause of fire
itself was covered by his contract, would largely
defeat this object.”
 Cond.
• When it is once established that the loss is
due to fire within the meaning of the
contract, the cause of the fire is, as a general
rule, immaterial.
• The fact that the fire was occasioned by
negligence does not exempt the insurer from
liability.
• “It is equally immaterial whether the fire is
caused by the negligence of servants or
strangers, or even by the negligence of the
insured himself”
 Contd.
• “where the act is committed without his
privity, the insured, being guilty of no
misconduct himself, does not commit a
breach of good faith in making a claim in
respect of his loss, and is therefore not
precluded from recovery”
• It was also observed that even if the fire loss
was caused by negligence of the insured, even
if it was correct, it was covered by the
insurance otherwise such policies would
practically be of little importance.
 Contd.
• The court also referred the book Principles of
Insurance Law by Dr. Avtar Singh:-
• “In insuring against fire, the insured wishes to
protect himself from any loss or detriment which
he may suffer upon the occurrence of a fire,
however it may be caused. So long as the loss is
due to fire within the meaning of the policy, it is
immaterial what the cause of fire is, generally.
• Thus, whether it was because of the fire was
lighted improperly, or was lighted properly but
negligently attended to thereafter, or whether the
fire was caused on account of negligence of the
insured or his servants or strangers, is all
immaterial and the insurer is liable to indemnify
the insured”
 Cond..Harris v. Poland (1941)
• Lord Atkinson, J. had observed:
• “It mattered not whether the property had gone
to the fire or the fire had gone to the property.
There had been ignition of the insured property
not intended to be ignited, and the loss fell
within the plain words of the policy”
• In Slattery Mance (1962), Mr. Justice Salmon
observed that “once it was shown that the loss
was caused by fire, plaintiff had made out prima
facie case and onus was upon insurer to show
that, on balance of probabilities, fire was caused
or connived at by plaintiff, and that there was
no principle of common law or authority for….
 Cond.
• For proposition that, when facts were
peculiarly within knowledge of person against
whom assertion was made, onus shifted to
that person; and that, therefore, onus was on
insurer.”
• Thus, in view of aforesaid points, the court
held that it was only insurer only to make the
case that they were not liable to pay any
amount on the ground of fraud or foul play or
making out a case of non-availability of good
faith.
 Spontaneous combustion: exclusion
• Manoj kumar Daga v. Div. manager, NIC Ltd.
• If the loss is due to spontaneous combustion
were excluded in the policy, the insurance
company would not be responsible or liable to
make good the loss.
• In the case the insured solvent extraction
plant was having the stock of rice bran, de-
oiled rice bran, de-oiled soyabean, de-oiled
cakes, saal seeds and other articles.
• A fire broke out resulting in damage
 Contd.
• The claim was repudiated in view of exclusion of
the policy which had excluded coverage of risk
due to spontaneous combustion.
• Thus the question before the commission was
whether the incident was due to spontaneous
combustion in the DOC.
• The evident revealed that on the day of the
incident that the plant supervisor noticed smoke
coming out of the stock of DOC which was kept in
the extreme east of the premises.
• On removing some bags on the top he found heat
in the depth of the stock and the D0C were
charred. The nature of the damage to gunny bags
and charred DOC confirmed that it was a case of
spontaneous combustion.
 Pre-ignition damage
• Ammireddy oils Ltd v. OIC Ltd
• A fire policy was taken regarding raw material
and finished products like rice-bran, de-oiled
bran, rice-bran oil etc. lying in the factory
processing rice bran. The loss due to spontaneous
combustion was also covered by paying an
additional amount of premium.
• The stock was dumped in one corner of the
godown wall to wall, chocking the ventilation. A
fire broke out damaging the stock. The insurance
company had deducted 25% of the loss on the
ground that it was pre-ignition loss.
 Contd.
• The commission observed that:-
• “We have no inhibition in accepting that there
may be weight loss in the process of oxidation
heating reaching the final stage of spontaneous
combustion.
• If loss due to spontaneous combustion is covered,
it would also cover the aforesaid weight loss
caused in the process of oxidation, heating, and
reaching to the ignition point in the process of
spontaneous combustion.
• Accordingly, the estimated loss of 25% relating to
the damaged quantity as pre-ignition damage to
self-heating would be covered under the policy
relating to risk of spontaneous combustion”
 Murli Agro Products Ltd. v. Oriental
Insurance Co. Ltd.
• The question which requires decision in this
complaint is whether coverage under the
insurance policy for the peril of 'its own
fermentation, natural heating or spontaneous
combustion' stands excluded if there is no
flame or fire?
• Admittedly the complainant took the
insurance policy for a sum of Rs.7 crores by
paying a premium of Rs.1,78,054/- for the
stock stored in the godowns, namely, 'stock of
all kinds of soya seeds'/DOC/DORB.
 Contd.
• In addition, Item 8 of the policy provides for
properties required to be insured - specifically,
inter alia, covers spontaneous combustion. The
said term is quoted above:
• "Building construction warranty, agreed bank
clause, spontaneous combustion warranty,
earthquake warranty, godown warranty, 'C' & 'D"
as per form attached h/w. The Insurance under
this policy is subject to warranties and clauses (as
per forms attached) and extended to cover risks
(as per forms attached). The total sum assured Rs.
7 crores only on item(s) above bearing No. 4
only."
 Contd.
• The slip attached to the policy provides as
under:
• "SPONTANEOUS COMBUSTION
• In consideration of the payment by the
Insured to the Company of additional
premium of Rs. _____ the Company agrees
notwithstanding what is stated in the printed
Exclusion of this policy shall extend to include
loss or damage by fire only of or to the
property insured caused by its own
fermentation, natural heating or spontaneous
Combustion."
 definition
• "In scientific literature combustion is defined as
under :
• 'The burning of any substance, whether it be
gaseous, liquid or solid. In combustion, a fuel is
oxidized evolving heat and often light....
• ‘The combustion of solids such as coal and wood
occurs in stages. First, volatile matter is driven
out of the solid by thermal decomposition of the
fuel and burns in the air. At usual combustion
temperature, the burning of the hot, solid residue
is controlled by the rate at which oxygen of the
air diffuses to its surface....
• (Mc-Graw Hill Encyclopaedia of Science &
Technology, New York, Vol.3 1982).
 observation
• (a) Firstly, undisputedly, if the damage to the
property is because of the 'fire, for any
reason', there is insurance coverage.
• The exclusion clause does not provide that
loss or damage caused by fire on account of
'spontaneous combustion' is excluded.
• Reading the term as it is, it can be held that
what is excluded is loss or damage caused by
spontaneous combustion which may or may
not cause fire or flame.
 Contd.
• (b) Secondly, for the peril which is excluded,
namely, the spontaneous combustion,
insurance coverage is given, i.e. to say, if the
insured property is destroyed or damaged by
spontaneous combustion the Insurance
Company is liable to pay to the insured the
value of the property.
• (c). Thirdly, recovery of additional premium
indicates the nature of the contract that
subsists between the parties. That contract
cannot be of giving insurance coverage only in
case of damage by fire.
 Cond.
• If that contention is accepted, the object and
purpose of payment of additional premium is
frustrated. Recovery of additional premium
indicates acceptance of risk by the Insurance
Company for the perils contemplated
 Contd.
• Hanil Era Textiles Ltd. v. Oriental Insurance Co.
Ltd. & Ors. (2001) 1 SCC 269, the Apex Court
has referred the aforesaid paragraph from the
Halsbury's Laws of England that,
• “when the premium is thus demanded and
collected at a higher rate, it is an indication
regarding the nature of the contract that
subsists between the parties, namely, that the
insurer was aware of the higher risks involved
 Contd.
• (d) Fourthly, if the contract is vague, the intention of
the contracting parties is to be gathered from the
surrounding circumstances or the nature of the
contract.
• Utmost goodfaith, it is settled law that contract of
insurance is based upon good faith. It is the duty of
the insurers and their agents to disclose all material
facts within their knowledge since obligation of good
faith applies to them equally with the assured [(Re.
M/s. United India Insurance Co. Ltd v. M.K.J.
Corporation, (1996) 6 SCC 428)].
 Contd.
• If the insurance coverage was not extended even by
taking additional premium for the damage caused by
spontaneous combustion/natural heating which may
not result in fire, it ought to have been clearly stated.
• If the contract is vague, benefit should be given to the
insured. The exclusion term of the insurance policy
must be read down so as to serve the main purpose of
the policy that is to indemnify the damage caused due
to fire. [(B.V.Nagaraju v. M/s. Oriental Insurance Co.
Ltd.) (1996) 4 SCC 648)].
• Finally, it is to state that it is high time for the Insurance
Company to have terms clearly defined in the
insurance policy with a reasonable clarity and not to
continue with the old forms which terms are vague.
 Central Bank Of India Ltd. v. Hartford
Fire Insurance Co. Ltd
• By a policy dated May 1, 1947, the respondent
insured the appellant as the mortgagee and a
firm of the name of Bombay Import and
Export Agency as the owners against loss
suffered by the destruction of or damage to
certain goods by fire between March 20, 1947,
and March 20, 1948.
• For the period covered by the policy prior to
its date presumably there existed provisional
policies but with these, if any, we shall not be
concerned.
 Contd.
• The insurance was subject to various conditions
and stipulations printed in the policy of which
Clause 10 was in the following terms :
• "This insurance may be terminated at any time at
the request of the insured, in which case the
company will retain the customary short period
rate for the time the policy has been in force.
• This insurance may also at any time be
terminated at the option of the company, on
notice to that effect being given to the insured, in
which case the company shall be liable to repay
on demand a rateable proportion on the premium
for the unexpired term from the date of the
concealment. "