Fire Insurance

Issues for Discussion:

 
►Define Fire

►Define Fire Insurance

►Fire Waste and Causes of Fire Waste

►Fire Insurance Policies

  ►Essential Elements of Fire Insurance Contract

►Define Fire

 Fire must be satisfied two conditions.  Such as, First, there should be actual fire or ignition, and
Second, the fire must be fortuitous in its nature.

 ►Define Fire Insurance Contract

Fire insurance is a contract whereby one party undertakes in exchange for a premium, to
indemnity the other party against a loss or damage cause to specific property by fire during a
particular period to the extent of a definite sum. Fire insurance is a device to compensate for the
loss consequent upon destruction by fire. It is a compensative device to share the loss. Fire
insurance should be included:

 1.      It is a co-operative device to share the loss.

2.      It involves two parties.

3.      It is a compensation contract.

4.      During a particular time the compensation will be completed.

5.      It may be fire by loss.

6.      The subject-matter of insurance is certainty.

 ►Fire Waste and Causes of Fire Waste

 Fire Waste: Fire Waste is to compensate for the loss consequent upon destruction by fire.
According to Lord Brooke, “Fire is a good servant but a bad master”. If we face financial loss by
fire, it is called fire waste.

Causes of Fire Waste: Fire waste is the result of two types of hazards. Such as follows:

             1. Physical causes.

            2. Moral causes.

1. Physical causes: Physical causes depend on the property. It refers to the inherent risk of
fire in the property which may occur due to inflammable nature, construction, artificial lighting and
heating, lack of extinguishing apparatus use of the property etc.

2. Moral Causes: Moral cause depends on the person. The moral hazard depends upon the
man and physical hazard depends upon the property. The property may be set on fire by the
owner or by any person with his willingness; carelessness and lack of sense of duty may also
increase the fire waste. When market price is going down the owner can willingly set fire on the
property and gain compensation form the insurer. Thus, where the property was destroyed with
the willingness of the property owner, moral hazard exists.

 ►Types of Fire Insurance Policies

 The fire insurance policies are as follows:

                    1. Valued Policy

                    2. Valuable Policy

                    3. Specific Policy

                    4. Floating Policy

                    5. Average Policy

                    6. Excess Policy

                    7. Declaration Policy

 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 market value of
the properties. The measure of indemnity is, in consequence, not valued at the time of fire, but a
value agreed at 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 specially pictures, sculptures, and works of art, jewelry, rare things, and 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.

 2. Valuable Policy/Unvalued: Valuable policy is that policy where 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 it is determined at the time and place of loss. This policy is
truly representing the doctrine of indemnity.  This is also called an open policy.

 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, then it is known as specific policy.

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 in relation to the same owner. The
floating policy is useful to cover fluctuating stocks in different locations. A floating policy is that
which covers the fluctuating risk of several goods lying in different localities for supply to various
markets. Such a policy is usually taken out under one sum and one premium by the businessman
whose goods are lying at docks and warehouses.

5. Average Policy: Policy containing ‘average clause’ is called an average policy. The amount
of indemnity is determined with reference to the value of the property insured. This clause
requires the insurance company to pay only that portion of the loss which is borne by the insured
amount to the actual value of the subject matter of the insurance. For example a value of the
property is Rs.1,00,000. It is insured for Rs.60,000 (60% of the total value) and the amount of
loss is Rs.60,000. The insurance company will not pay Rs.60,000 to the policyholder but will pay
Rs.36,000 (60% of Rs.60,000).

6. Excess Policy: Sometimes, the stock of a businessman may fluctuate from time to time and
he/ she may be unable to take one policy or specific policy. If he/ she takes policy for a higher
amount, he/she has to pay the higher premium. On the other hand, if he / she takes insurance for
lower amount, he / she will have to bear the proportionate amount of loss. The insured in this
case can purchase two policies, one ‘First Loss Policy’ and second, ‘Excess Policy’. This
policy is issued for the stock of merchandise whose value is constantly fluctuating. In such case it
is not suitable to take one policy for certain sum. So the insured takes an ordinary policy for
minimum value of the stock and excess policy for excess value of the stock. The actual value of
the stock will be reported periodically.

7. Declaration Policy: The excess policy contributes to only a ratable proportion of the loss
because if the amount of excess stock exceeds the sum set in the excess policy. The declaration
policy will give a better protection in such case where the stock fluctuates from time to time.
Under the declaration policy the insured takes out an insurance from the maximum amount that
he/ she considers would be at risk during the period of the policy. On a fixed date of ever month
or a specific period, the insured furnishes a declaration of the amount.  This policy is taken for
covering the stock where great fluctuations in the value can happen throughout the contract
period. On such policy 75% of the premium has to be deposited in advance. The maximum
liability of insurance company is specified in the policy by the insured. At the end of year the
average stock and final premium is calculated.  
►Essential Elements of a Fire Insurance Contract

                 1. Features of general contract

                a) Proposal

                b) Acceptance

                c) Commencement of risk

   2. Insurable Interest

                3. Principle of Good faith

                4. Principle of Indemnity

                5. Doctrine of Subrogation

                6. Warranties

                7. Proximate Cause.

 1.  Features of General Contract:

 All the features of general contract are also applicable to the fire insurance contract.

a) Proposal: The proposal for the fire insurance can be made either verbally or in writing. The
proposal gives the necessary description of this property to be insured. In practice the printed
proposal form is used for the purpose. Introduction, type of properties, value of properties,
construction, occupation, etc., are the various information which required by the insurer. The
answer to these questions must be completely correct. The assured must disclose all the material
facts and should observe utmost good faith. The description of the subject matter of insurance is
the basis of the contract for assessing the risk and fixing the premium.

b) Acceptance: On receipt of the proposal form, the insurer will assess the risk. Sometimes,
when the contents and subject – matters are not of very high amount, the insurer may accept on
the basis of proposal form only.   

c) Commencement of Risk: The risk commences as soon as the contract is completed

provided there is no specific time for the purpose. As soon as the proposal is accepted, risk will
commence irrespective of the fact that no policy was issued and no premium was paid.

2. Insurable Interest: Insurable interest is the general principle of insurance. Without an

insurable interest, insurance cannot lawfully be enforced for an insurance unsupported by an
insurable interest would be a gambling transaction. Insurable interest will be there where the
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.
The insurable interest in fire insurance must be present at the time of contract and at the time of
loss. Insurance contract will be invalid if the property is sold to another party. Similarly, if there is
no insurable interest at the time of insurance, the contract will be invalid.

3. Principle of Good Faith: The contract of fire insurance is one in which the observance of
the utmost good faith- uberrima fides- by both the parties are of vital significant. The utmost good
faith in fix insurance has two aspects – first, discloser of material facts and second, preservation
of the property insured. The insurer and the insured must furnish detailed information regarding
the subject matter to be insured. The insured, since he has more information about the subject –
matter, must disclose all the information asked truly and fully. The assured is also required to
disclose all the material information which is known to him although it was not asked by the
insurer. Material fact is one which influences the decisions of the insurance.

4. Principle of Indemnity: The principle of indemnity aims to compensate the insured for a
loss sustained, and the compensation should be such as to place him/her as nearly as possible in
the same pecuniary position after the loss as he/she occupied immediately before the
occurrence.

5. Doctrine of Subrogation: Subrogation means the right of one person to stand in the place
of another and to avail himself of the latter’s rights and remedies. The Doctrine of Subrogation is
just a corollary to the Principle of Indemnity. 

6. Warranties: The contents of proposal form are expressly incorporated in the policy, which for
warranty. 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/she affirms or negatives
the existence of a particular state of facts. Warranties which mentioned in the policy are called
express warranties and those warranties which are not mentioned in the policy are called implied
Warranties.

7. Proximate Cause: The rule is that the immediate and not the remote cause are to be
regarded – Causa Proxima Non-remota Spectata. Proximate Cause is very important in fire
insurance. The insurer always takes the Proximate Cause while paying the claim. If the property
insured is burned but the fire was preceded and brought into operation by an expected peril, the
legal position depends upon whether the expected peril was the Proximate. The remote cause is
when an incendiary bomb damaged the property; the Proximate Cause is enemy action.
Material Loss Insurance
A) Standard Fire Policy
B) Special Perils Insurance – Additional perils coverage
C) Declaration Policy – Declaration about Value fluctuations
D) Blanket Policies – Insurance for total of a specified category assets
E) Reinstatement Policy – Standard Fire policy + loss settlement according to replacement
cost rather than market value immediately before the fire.
F) Building in course of erection (construction)
G) Household policies
H) Sprinkler leakage insurance

Combustion = fire / burning

Tempest = Different types of Storm
Insurrection = Revolution