IC 57 – Fire and Consequential Loss Insurance

Chapter 1 – Basic Principles and the Fire Policy

The subject matter of fire insurance may be any kind of moveable and
immovable having pecuniary value.
Fire Insurance contracts are governed by the general law of contract
as embodied in the Indian Contract Act, 1872.
Fire Insurance is governed by basic principles evolved under common
law. These include: Utmost good faith, Principle of Indemnity,
Insurable Interest, Proximate Cause, Contribution and Subrogation.
The sum insured is to be fixed by the insured.
The sum insured should represent the actual value of the properly
insured. If there is over insurance, there is no benefit to the
insured; if there is under-insurance, the claim amount will be
proportionately reduced by applying pro-rata average.
Fire insurance business was governed by the All India Fire Tariff.
The Tariff Advisory Committee have laid down rules, regulations,
rates, advantages, terms and conditions for fire insurance business
in India under the provisions of Part IIB of the Insurance Act, 1938.
The fire policy form consists of three main parts: Operative clause,
General exclusions and General conditions.
Perils covered generally include: fire, lightning, explosions,
implosions, aircraft damage, riots, strike, terrorism damage, storm,
cyclones, hurricanes, tornados, bush fire, leakage, etc.
There are generally thirteen exclusions prescribed in a fire policy.
There are generally fifteen conditions prescribed in a fire policy.
Key Terms: Fire insurance business, Utmost good faith, Subrogation,
Contribution, Insurable interest, Principle of indemnity, Proximate
cause, Market value, Reinstatement value, Fire Tariff, Operative
Clause, Terrorism damage, Indemnity condition, Pro-rata average
condition, Arbitration condition.
The principle of subrogation and principle of contribution are
corollaries to principle of indemnity.
Damage to the stocks in cold storage premises is generally excluded
but may be covered by endorsement under “add-ons”.
Principle of insurable interest gives legal validity to insurance
contracts.

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The sum insured can be fixed on reinstatement value or market value,

or agreed value.
Chapter 2 – Add On Covers and Special Policies
Add on covers are extensions of the fire policy on payment of
additional premium and granted by attachment endorsements.
Combustions due to fire only is the additional cover that is provided
in respect of fire damage only, as a result of spontaneous
combustion.
Earthquake (Fire and/Shock) is the additional cover which is
available for Earthquake Fire Only or Earthquake (Fire and Shock
both).
The forest fire extension includes loss of or damage to the property
insured directly caused by burning of forest, jungles and clearing
lands fire.
Impact damage due to insured’s own Vehicles and the articles dropped
from them is the extension that covers loss by direct impact to
insured’s property caused by insured’s own power driven vehicles,
forklifts, cranes, etc.
Deterioration of Stocks in Cold Storage due to accidental power
failure consequent to damage at the premises of Power station due to
an insured peril is the extension that covers damage to the property
insured caused by change of temperature.
Architects Fees Add on permits expenses up to 7.5% of admitted loss
towards fees in connection with superintendence of the reinstatement
for building, machinery, accessories and equipment.
The Debris removal extension endorsement provides cover for Debris
Removal up to 10%.
Omission to insure, Additions, Alterations or Extensions Clause is
applicable to all new buildings, Machinery, plant and contents
declared, which the insured may erect or acquire.
The Spoilage Material Damage extension covers material damage perils
causing spoilage same as in fire policy.
Leakage and Contamination cover is for physical loss by leakage by
its container due to due to accidental leakage and all accidental
contaminations by contact with foreign matters.
Insurance of Additional Expenses of Rent for An Alternative
Accommodation extension is for non manufacturing premises only under
material damage.
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Start up Expenses extension covers start up costs necessarily and

reasonably incurred consequent upon loss or damage.
Escalation clause provides an automatic increase in sum insured from
the day of inception of cover.
The reinstatement value policy provides a basis of fixing sum insured
on the fire policy form with a Reinstatement Value memorandum
incorporated therein.
Reinstatement Value Policy may be extended to cover additional cost
of reinstatement incurred by the insured to comply with regulations
enforced by authorities by incorporating the Local Authorities clause
in the policy.
A declaration policy is a fire policy with a Declaration clause
attached to it. The insured can fix a ‘provisional sum insured’
which represents the highest value of stocks at any point of time
during the policy period.
Floating policies are granted to cover under a single policy stocks
which fluctuate between different locations.
Some of the clauses for special purposes commonly used in fire
insurance which can be modified according to specific requirements
are Agreed bank clause, Contact price insurance clause and
Designation of property clause.
Leakage and Contamination clause cover for accidental leakage and
contamination of oils and chemicals.
The minimum sum insured for Declaration Policies shall be Rs.1 crore.
A Policy on the basis of Contract Price can be issued only for
imported goods.
Spoilage Material Damage clause extends cover to material damage by
perils causing spoilage to loss of stocks in process.
The declaration policy cannot be issued in case of Insurance required
for short period, Stocks undergoing process and Stocks at railway
sidings.
Declaration policies shall be issued for stocks which are subject to
frequent fluctuations in value, or in quantity.
Chapter 3 – Fire Hazards and Fire Prevention
The terms “Fire Hazards”refers to not only the causes of fires
(sometimes called originating or inception risk) but also those
circumstances which increase the probability of a fire occurring, or

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which enable fires to spread and increase the loss (contributory

risk).
The different type of fire hazards that can result in losses are
Originating hazards, Contributory hazards and Hazards arising from
construction.
Fire load is defined as the quantity of heat liberated, per unit of
floor area, when a building and its contents are completely burnt.
Experts have recognized three main classes of occupancies, on the
basis of fire load. This also conforms to the relevant Indian
Standard Specification.
Low fire load – Generally residential premises, offices, hotels, etc.
Moderate fire load – Generally retail shops and factory buildings.
High fire load – Generally bulk storage godowns and warehouses.
The term “fire resistance”denotes the capacity of an element to
withstand heating of specific severity (standard fire), while
performing its normal functions, thus restricting, the spread of fire
in a building for a definite time.
To evaluate fire resistance the different components of structure
that are evaluated are as follows:
Constructional hazards, Exposure hazards, Height, Size, Silent risk,
Hazards arising from goods, Miscellaneous hazards.
Exposure hazard arises due to contiguity or closeness of the exposed
property (premises or buildings) to adjoining or neighbouring
premises buildings from which a fire may spread and/or loss or damage
from fire, smoke, heat, water or breakage may result.
The three main factors in the consideration of exposure hazard are:
Constructional features, Distance from other buildings and Conditions
existing between buildings.
A single storey building having ground floor only is known as shed
structure and a storied building is inferior to a shed structure from
hazards point of view.
The greater the size of the building, the greater will be the fire
hazard. Further there is more value at risk in a large building than
in a small one. Because of large size, it is more difficult to locate
and fight an outbreak of fire.

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A manufacturing risk is deemed to be silent when it is not used for

manufacturing and storage purposes. A lower rate of premium is
charged for the silent period.
In case of hazards arising from goods, goods are classified into
hazards and extra-hazards based on following features:
Ease of ignition, Speed and intensity of burning, Method of packing,
Explosion, Contamination, Interaction with other materials, Toxicity,
Difficulty of fire extinguishment.
Combustion that can occur without heat being supplied externally is
referred as Spontaneous combustion. Spontaneous combustion may occur
in these circumstances:
Slow oxidation, Absorption of Oxygen from the air by porous
substance, Action of bacteria leading to oxidation.
When fire is detected in its early stages, trained personnel can
easily extinguish it using first aid appliances. Automatic fire
detection systems can thus help minimise fire losses. These detectors
are activated by smoke, radiation or heat.
The term “Good Housekeeping” embraces all measures taken by a
progressive management to promote efficiency and foster safety at the
work place. Good housekeeping depends upon the culture of the
organisation and is derived from the positive attitude of the top
management.
Construction is an example of contributory hazards.
Residential premises are classified under low fire load.
Slow oxidation generates heat, and with the rise in temperature,
oxidation is accelerated until ignition point is reached and waste
catches fire. Hence slow oxidation can lead to spontaneous combution.
Sprinkler Installation is a device designed for automatic detection
and extinguishment of a fire by the use of water in its initial
stages.
Warehouses are classified under high fire load.
First Aid Appliance are portable extinguishers, buckets and internal
hose reels designed for use on fire in the early stage.
The presence of defective windows, trap doors etc is an example of
bad housekeeping.
Chapter 4 – Erstwhile Tariff – Rules and Rating

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The general rules and regulations prescribed in Section 1 of the

erstwhile tariff are applicable to all sections of the tariff. These
rules are now observed by insurers as good practice.
Valued polices are issued only for items for which market value
cannnot be ascertained.
Long-term policies are issued for 36 months or for house/flat owners.
Policies for a period of less than 12 months must be issued at the
short period scale of rates.
If insurance is cancelled at the option of:
The insured: Retention of premium shall be at short period scale.
The insurer: Refund of premium shall be on pro-rata basis.
Pro-rata refund of premium may be allowed if a policy is cancelled:
On account of a Government order, or
On completion of a “Building in course of construction”, or
Where building is demolished.
Generally, it is not permissible to grant mid-term cover for STFI
and/or RSMTD perils. However, where such covers are granted mid-term,
the following provisions shall apply:
Insurers must receive specific advice from the insured accompanied by
payment of additional premium in cash or by a demand draft.
The cover shall be granted for the entire property under one or more
policies.
Cover shall commence 15 days after the receipt of premium.
Premium rates shall be charged on short period scale on full sum
insured for the balance period i.e. up to the expiry of the policy.
Mid-term increase in sum insured is allowed on pro-rata basis, while
decrease in sum insured is permitted on short period basis.
Risk in Multiple Occupancy Industrial Estate shall be rated “Per
Se”.
“Per Se”rating means each risk will be charged as its own merits at
applicable rate of premium.
Fire insurance premium rating is based on certain basic principles:

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Firstly, the rate of premium must be commensurate with the physical

hazards involved.
Secondly, classification of risks, based on hazards evaluation, into
homogeneous groups, is adopted. Each group comprises risks exposed to
more or less, the same degree of exposure.
Thirdly, the rate of premium is based on the past loss experience of
each group.
Fourthly, the principle of discrimination differentiates individuals
risks within a group taking into account favourable and unfavourable
features present. Thus, discounts in the premium are granted.
In Simple risks(Section III), of the Tariff prescribes rates for 4
types of simple occupancies. Some examples are:
Dwellings, Offices, Colleges, Hospitals, Showrooms where goods are
kept for display and no sales are carried out.
Restaurants, Hotels.
Shops (non-hazardous goods), Laundries, Amusement Parks.
Shops (hazardous goods).
In Industrial/Manufacturing risks(Section IV) Rates are provided for
about 205 industrial/manufacturing risks arranged in alphabetical
order. The rates under this section shall be uniformaly applicable to
the entire insured property in the same industrial compound. This is
known as ‘One risk one rate’.
The Utilities(Section V) provides rates for utilities located outside
the industrial/manufacturing risks(Stand Alones).
Rates are provided in Storage risks(Section VI) for different types
of goods stored in godowns/silos or in the open outside the compound
of industrial/manufacturing risks.
The Tank/Gas Holders(Section VII) section provides representative
rates for gas holders and tanks located outside the compound of
industrial/manufacturing risks.
Chapter 5 – Documents
The following is summary of the contents of the proposal form:
Details about proposer, Coverage, Details of the property, Details of
sum insured and Declaration clause.

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For manufacturing risks like large factories, huge plants or

industrial complexes with a larger number of different blocks, a risk
inspection report is submitted by the insurer’s engineers.
The main object of risk inspection report is to provide the
underwriter with a complete picture of the risk so that he is enabled
to determine the rates of premium and the terms of insurance.
During the time lag between the receipt of a proposal and the issue
of the policy the insurers provide evidence of insurance protection
through the issue of an Acceptence cum Receipt and/ or Cover Note.
Fire Policy is drafted based on information furnished in Proposal
Form and Cover note which is replaced by the Policy.
Drafting of the policies means completion of the schedule which forms
part of the fire policy.
The policy schedule provides for all individual details of the
insurance contract.
The format of policy schedule varies among the insurers. The format
provides for individual details of the policy which may be considered
to fall under three cetagories of data: Identification Details, Risk
Description, Occupancy-wise Net Rate Data.
An endorsement has the same basic information as is found in the
policy format. An endorsement alteration usually affects part of the
policy only.
Renewal Notice is generally issued to the insured 30 days in advance
of the expiry date of the policy and it is purely a reminder as a
matter of business courtesy.
In a proposal form, declaration clause can be used to convert the
answers given by the proposer to become continuing warranties.
In the format of policy schedule, ‘description of property’ is
included under “risk description”.
Name and address of insured and insurer are included under
“indentification details” of policy schedule.
If insured wishes to make alteration in the period of insurance, then
such changes can be made in Endorsement.
Chapter 6 – Underwriting
The term ‘underwriting’ is broadly used to denote the principles
and practices concerning:

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The acceptance or rejection of the risks, The fixing of rates, The

total amount of acceptance, The amount of retention for insurers own
account and Treatment of the balance through reinsurance.
Several factor enter into underwriting and these may be broadly
classified as follows:
The production of well spread and a large volume of business, The
selection of the business,The determination of the limits to be
retained and The reinsurance of the surplus.
The production of a large volume of business is governed by the need
for wide distribution of risks class-wise and geographically.
The selection of the business involves careful scrutiny of the
business acceptances with a view to making a proper assessment of the
fire hazards involved.
The term ‘retention’ refers to the amount which an insurer is
prepared to retain for own account on a risk; alternative terms used
are “limit”and “net holding”.
The individual features in the risks which affect limits may be
considered as follows:
Construction and occupancy, The probable effects of any outbreak of
fire on the stocks and the possibilities of salvage, Fire protection,
The situation of the risk.
The term ‘Maximum Probable Loss’ (also known as “Estimated
Probable Loss” - EML) refers to the insurer’s estimate of potential
liability in the worst event.
The maximum amount of ‘risk’ (property located in one compound in
terms of sum insured or PML) that can be assumed for the own account
of an insurer, in respect of single ‘risk’ is termed the Net
Retention Capacity.
PML assessment factors: These can be classified into broad categories
as under: Technical Information, Insurance Information, Third Party
Information, Causes of Loss Information.
PML error/ PML burst generally denotes an actual loss being larger in
size than PML estimates.
Reinsurance is an arrangement whereby Direct Insurer who has insured
a risk insures a part of that risk again with another insurer, that
is to say, reinsures a part of the risk in order to reduce his own
liability.
There are two main methods of reinsurance: Facultative and Treaty.
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The main feature of the facultative method is that each risk is

reinsured individually.
Under proportional treaties the ceding company decides the part of
the original insurance, it wishes to retain for its own account and
cedes the balance to the reinsurer.
Under Quota Share Treaty, the ceding insurer is bound to cede and the
reinsurer is bound to accept a fixed share of every risk coming
within the scope of the treaty.
The purpose of surplus treaty is to reinsure the surplus of a risk
beyond the amount of the ceding insurer’s retention.
CAT Excess of Loss (XoL) cover protects the insurers Net Retained
Account from losses of catastrophe nature e.g. losses caused by
wheather perils such as STFI; natural perils such as EQ and resultant
Tsunami, landslide bush fire etc. and political risks such as Riots,
SRCC or even conflagration.
The ‘burning cost’ is arrived at by taking a fixed period (say 4
years) and computing the ratio of the claims paid and outstanding for
the share of the excess of loss reinsurers to the gross net premium
income of the company for the period.
Types of Excess of Loss covers include ‘per risk’ cover and ‘per
event’ cover.
AIFT classifies India into four EQ zones with respect to frequency
and severity.
CRESTA’s main goal is to establish uniform and global system to
transfer, electronically, aggregated exposure data for accumulation
risk control and modelling among insurers and reinsurers.
The Indian Fire Reinsurance programme is reviewed annually and
arranged by GIC in consultation with its four subsidiary companies
and finally approved by Government of India. The objective is to
maximise retention within the country in order to save foreign
exchange outgo and to achieve this various methods are adopted.
The key ingredients of general insurance product pricing are:
Claims cost, Business acquisition cost, Management expenses, Margin
for fluctuation in claims experience and Reasonable profit.
Based on the types of risk for underwriting and exposures, the
products are classified into:
Class rated products: These are further sub-classified as Internal
tariff rated products and packaged or customised products.
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Individual rated products: These are further sub-classified as

Individual experience rated products, Exposure rated products and
Insurances of large risks.
‘Motor insurance other than fleets’ will be classified under
‘internal tariff rated products’.
With regards to burning intensity, ‘metal goods and hardware’ will
be classified under the category of ‘incombustible or burn very
slowly’.
EML stands for ‘estimated maximum loss’.
Based on risk profile data and other underwriting information an
estimate of CAT-PML for the treaty is arrived at. In hard market
conditions, reinsurers insist on additional control measures /
restrictions in the form of: Aggregate Cession Limit, Per Event Loss
Limit or Annual Loss Limit.
Chapter 7 – [Claims - Legal Aspects]
Duties of the insured: observe good faith, insured must take
immediate steps to extinguish the fire, Co-operate with fire brigade
personnel.
Under the fire policy, the onus of proving that the loss was the
direct result of fire is on the insured.
The essence of insurance contract is provision of indemnity for
financial loss suffered by the insured as a result of the happening
of an event insured against under the policy.
The liability in such circumstances in which the insured peril is
only of several events all of which have simultaneously or
successively produced the loss has to be determined in the light of
the legal maxim of promximate cause.
The classic definition of proximate cause is: “the active efficient
cause that sets in motion a train of events, which brings about a
result, without the intervention of any force started and working
actively from a new and independent source.”
A warranty is an undertaking by the insured:
That some partcular thing shall or shall not be done or
That some condition shall be fulfilled or
Whereby he affirms or negatives the existence of a particular state
of facts.

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Representations are statements made orally or in writing before or at

the time of concluding the contract. A representation must be
substantially true and should be made in utmost good faith.
Ex-gratia payments are claims which are paid as a matter of grace
where the loss is outside the scope of the policy or the liability
under the policy, in strict legal terms, is doubtful.
Value may be defined as the worth of anything in terms of something
else for which it can be exchanged either in other goods or in money.
There are two kinds of value: Value in use and Value in exchange.
Value in use is usually measured by the cost of replacing the
property less depreciation. This cost is usually a matter of opinion.
Value in exchange is determined by what a buyer will pay for the
property or by what it would cost to buy similar property at the
place and at the price ruling at the time (market value).
The term ‘Market Value’, in insurance practice, has different
meanings in different situations but the objective in all cases is to
give effect to the principle of indemnity in a practical manner.
The term ‘depreciation’ refers to the reduction in the value of the
machinery due to usage, deterioration, wear and tear, rust,
corrosion, metal fatigue etc.
The term ‘batterment’ refers to the superior qualities of the
replaced machinery such as increased output, reduced consumption of
power, lower costs of maintenance etc.
The principle of indemnity simply says that “the insured is
adequately indemnified if he is restored to the financial position
which he occupied at the time of his loss in relation to the
property”.
The principle of indemnity has two corollary principles: Principles
of contribution and Principles of subrogation.
Stock-in-trade refers to the merchandise (articles and commodities)
which are held for sale in retail shops or in wholesale
establishments, factories.
Chapter 8 – [Claims - Procedural Aspects]
On recipt of claim intimation, the first step is to verify Policy
Coverage.
After verification, the claim is registered and a claim number is
alloted.

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After registration of the claim, a claim form is issued to the

insured for completion and return.
If the loss is known or expected to be large, then licensed
independent loss surveyors and assessors are assigned the job of
investigation and report on, inter alia, the cause and extent of
loss.
After completing his initial investigation, the surveyor submits a
preliminary report.
Thereafter, a final report is submitted giving full details of the
adjustment of the loss and the surveyor’s opinion on the question of
liability under the policy.
As per Condition 15 of the fire policy, upon the settlement of any
loss under the policy, pro-rata premium for the unexpired period from
the date of such loss to the expiry period of insurance for the
amount of such loss shall be payable by the insured.
The discharge voucher is to be signed by all the persons named in the
policy as “The Insured”, and the cheque is drawn in favour of all
parties mentioned in the policy.
The claims are which are paid will be reflected in the accounts which
are prepared at the time of closing.
The surveyor’s primary duties are given in Rule 13(1) of Insurance
Surveyors and Loss Assessors (Licensing, Professional Requirements
and Code of Conduct) Regulations, 2000.
In reinstatement claims, specific confirmation as to verification of
the physical reinstatement of the damaged property has to be given.
In business interruption claims, the surveyor gets into the role of
MD of insured and advises the insured as to how they can restart the
operations quickly, as to how they can cut down the period of
interruption and also reduce the shortage in output/turnover.
In simple and small losses, the surveyor would inspect the damaged
property or its remains, determine the cause and extent of loss and
submit his report.
In large complicated losses, the process of inspection will be
elaborate and comprehensive. The first step is to take or recommend
measures directed at minimisation of loss and protection of salvage.
A thorough examination at an early stage of undistrubed salvage may
reveal the real, or indicate the most probable cause of fire.

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One of the most important functions of survey is to determine the

value of property covered by insurance and the amount of loss that it
has suffered. This value is estimated and fixed, when the property is
in evidence, by inspection and examination.
There is no standardised final survey report form and each surveyor
uses his own format for submiting report. However, the final survey
report generally consists of the following items of information: Name
of the insured, Address of the insured, Name of the bank, Interest of
a financial institution or other mortgagee.
In simple claims, the surveyors would mention here the amount of loss
originally claimed by the insured and the amount now recommended
after discussion and negotiation with the insured.
In complex claims, where extensive damage is involved to buildings,
machinery, etc. the section would provide detailed information.
On intimation of any loss where a surveyor has to be appointed for
assessing a loss/claim, it shall be so done within 72 hours of the
receipt of intimation from the insured.
In no case shall a surveyor take more than six months from the date
of his appointment to furnish his report.
In a claim settlement, in case of delay in the payment, the insurer
shall be liable to pay interest at a rate which is 2% above the bank
rate prevalent at the beginning of the financial year in which the
claim is reviewed by it.
If the loss could be attributed to a third party, the surveyor should
indicate the possibilites of recovery from the third party under
Subrogation proceedings.
Chapter 9 – [Consequential Loss Insurance – I]
Fire insurance affords cover for ‘material damage’. The object of
loss of profits insurance is to make good some of trading losses
suffered due to total or partial stoppage of business due to a fire.
The trading losses which result from stoppage of business may be
considered under three headings: Net profit, Standing Charges and
Increased cost of working.
Loss of profits is determined and measured with reference to
reduction in turnover and this is the basis adopted in profits
insurance.
Turnover consists of following three elements: Variable charges,
Standing charges and Net profit.

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The measure of indemnity is the sum produced by applying the rate of

gross profit to the reduction in turnover during an agreed period
following damage.
The indemnity period chosen by the insured may very from 3 months to
3 years.
The sum insured is to be computed from the insured’s accounts e.g.,
Trading and Profit & Loss accounts.
The proviso clause says that the insured must maintain a material
damage fire policy and claim under C.L. Policy will be paid only if
the material damage claim is paid or payable.
The schedule provides for incorporation of the particulars of the
individual contract.
Specification is an important part of the policy and provides for
definations, formula for ascertaining the liability for any loss etc.
The “Adjustment Clause”, is bracked against the rate of gross
profit, annual turnover and standard turnover, all of which are the
essential factors in calculating the loss.
As per the ‘departmental clause’, if the business is conducted in
separate divisions or departments, and the trading results of each
division are separately maintained, then the loss can be calculated,
as per the specification, separately for each department affected by
the damage.
Notice shall be given to the company and if required, an additional
premium paid, if the rate of premium payable under the policy is
increased (Condition 2).
No claim is payable or any ‘on-account’ payment shall be paid, if
the terms of this condition are not complied with (Condition 3).
Condition 5 provides that the policy and the schedule shall be read
together as one contract and Condition 6 excludes war and kindred
perils.
‘Salaries to permanent staff’ will be included under standing
charges.
Various definitions related to the policy will be included in the
‘specification’ section.
The subject matter of fire insurance is material property and the
subject matter of profits insurance is earning capacity of the
property.

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Chapter 10 – [Consequential Loss Insurance – II]

The rate of premium for C.L. policy consist of two components: Basis
rate and Percentage for the Indemnity Period.
In calculating basis rate, the contents of any storage / utility
blocks even if they are communicating with process blocks shoud not
be taken into consideration.
On payment of additional premium, the C.L. Policy can be extended to
included “Add-on” covers included in the fire policy such as
earthquake, spontaneous combustion, etc.
The basic fire policy covers gross profits which mean net profit plus
insured standing charges. The policy may, however, cover additional
items such as wages, lay-off / retrenchment compensation and
auditor’s fees.
Methods of insuring wages: Insurance for full indemnity period,
Annual method, Period or pro rata basis, Dual basis of insurance.
Under the Industrial Disputes Act, 1947, a statutory payment has to
be made by employers as per the provisions incorporated in the Act to
such workers, as are laid off and / or retrenched in the event of
closure of manufacturing concern due to “Fire” or the operation of
any other insured peril.
Under condition 3 of the policy, the insured is required at his own
expense to produce books of account and other documentory evidence to
support his claim for which he may ask his auditors to produce the
information required. The auditors fees for this work can be insured.
Turnover is used as the index of business activity and therefore, as
the measure of loss, in the great majority of consequential loss
insurances. The wording of ‘Output’ basis of specification is the
same as that used for ‘Turnover’ specification, except that
‘Turnover’ is substituted by ‘Output’.
The output basis of specification is adopted where loss measurement
under turnover basis does not provide a fair indemnity to the
insured, as when accumulated stocks are used by the insured to
maintain turnover in which case there will be no reduction in
turnover although there is reduction in output.
Under the Difference basis of specification Gross Profit is the
amount by which the sum of the Turnover and the amount of the Closing
Stock exceeds the sum of the amount of the Opening Stock and the
amount of the Specified Working Expenses.

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For claim settlement usually material damage and loss of profits

policies will be the same insurer who can appoint the same surveyor
for both loss assessments. However, depending upon circumstances
different surveyors may also be appointed.
Carry over provision is a feature offered under dual basis of
insurance method.
Rate of gross profit is defined as the rate of gross profit per unit
earned on the output during the financial year immediately before the
date of damage.
Details regarding final assessment of loss cannot be provided under
preliminary report submitted by Surveyor.
Under dual basis of insurance method of insuring wages, scheme wages
are entirely removed from gross profit cover, and are insured as a
separate item.
Termination of a workman by the employer for any reasons whatsoever
is an example of ‘Retrenchment’.
Gross revenue is defined as “the money paid or payable to the
insured for services rendered in the course of the business at the
premises”.
Chapter 11 – Specialised Policies and Overseas Practice
Risks covered under Petrochemical Tariff: Standard Fire and Special
Perils Policy shall be issued to cover manufacturing risks, storage
risks and miscellaneous blocks rateable under Petrochemical Tariff
2001.
All premises and/ or goods rateable are subject to the provisions of
AIFT unless otherwise specifically provided.
All risks falling under this Tariff have to satisfy minimum
requirements (related to fire protection and electrical installation)
for granting cover.
Applicable to Tank Farms: No tank used for storing Class A and B
products has a storage capacity exceeding 30,000 K. Liters.
The Tariff classifies ‘Flammable’ materials into Classes A, B, C, D
according to thir flash point.
Silent Risks: The risk is deemed silent only if all the hydrocarbon/
flammable materials/ combustible materials have been removed and it
has been purged (i.e. all apparatus and piping have been thoroughly
cleaned) before the inception of silent period and would continue to
be so throughout the silent period.
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Rating: The basic rate for each petrochemical plant is arrived at on

basis of the following factors:
Properties of chemicals, Quantity of flammable materials handled,
Type of each identifiable process/ operation, Temperature and
Pressure, Material of construction.
Excess Clause: The insurance does not cover 5% of the claim amount
subject to minimum of Rs. 5 lakhs resulting from each and every loss
in material damage insurance for all perils. The excess is applicable
per event and per insured.
All industrial risks (other than risks rateable under Petrochemical
Tariff) having overall Sum Insured of Rs. 100 crores and above in one
or more locations in India shall be eligible for Industrial for
Industrial All Risks Policy.
The cover in its widest form will include the following perils/
covers:
Compulsory: Fire and All Special Perils, Burglary (free), Machinery
Breakdown/ Boiler Explosion/ Electronic Equipment Insurance, Fire
loss of profit (Compulsory)
Optional: Machinery Loss of Profit cover.
Follwing clauses will have to be attached to the policy and the
insured will have to adjust or provide additional sum insured where
applicable: Agreed Bank Clause, ‘Architects’, ‘Surveyors’ and
‘Consulting Engineers’ Fees Clause, Designation of Property Clause,
Ommission to Insure Additions, Alterations or Extensions Clause.
Rating: Rates for this policy are based on: The detailed Risk
Assessment Report of the Engineer, Deductible opted by the insured,
Claims experience.
Sum insured: The policy in so far as it relates to Buildings,
Machinery, Furniture, Fixtures, Fittings and Electrical Installations
shall be on Reinstatement Value Basis only, while the Stocks shall be
covered on Market Value basis.
There is no Fire Tariff in the U.K. However, to have some uniformity,
The Association of British Insurers (ABI) has issued a book “The
Recommended Practices, Wordings and Procedures relating to Material
Damage”.
The standard fire policy covers only fire, lightning and Limited
Explosion.

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“All Risks” Policy: This policy specifies the exclusions. All other
perils are generally covered.
Fixation of Sum Insured: Buildings, machinery, accessories,
furniture, fixture, fittings and electrical installation are advised
to be covered on the reinstatement value basis. The other clauses
that are available are: Escalation Clause, Local Authorities Clause,
Cost of Erection, Architects/ Surveyor fees’ Clause.
Combined Policies: It is a single contract policy utilising one
proposal. Whilst, however, it is written as one contract, each
section or class of insurance is underwritten and rated separately
and will contain its own conditions, terms, exclusions and
warranties.
Package Policies incorporate the following covers: fire material
damage; consequential loss; theft, money, glass; goods in transit;
employers’ liability; public/ products liability; fidelity insurance
(occasional).
Practice in the USA: The commercial property coverages are provided
under standardised forms developed by Insurance Services Office, Inc.
(ISO) or the American Association of Insurance Services (AAIS) for
their member insurance companies.
A common form used to insure Commercial Property known as ISO
Business Personal Property coverage form.
The BPP provides cover for broad categories of property and several
supplemental coverages.
Insured Perils: The perils covered under the policy depend upon the
‘Causes of Loss’ form selected by the insured. Three forms are
available: Basic, Broad and Special forms.
Commercial Package Policy (CPP) which includes the following coverage
parts: Commercial property, Boiler and Machinery, Commercial crime,
Commercial inland marine, Farm, Commercial auto and liability.
The General Insurance Council represents the collective interests of
the Non-life Insurance companies in India. The Council speaks out on
issues of common interest; helps to inform and participate in
discussions related to policy formation; and acts as an advocate for
high standards of customer service in the insurance industry.
As per the rating pattern followed under the Petrochemical Tariff,
the Fire and Explosion rate for each plant, after application of all
loading and discounts, should neither be less than 65% of the basic
rate nor shall it be more than 165% of the basic rate.

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For flammable material classified as Class C, the flash point is

above 65o C and up to 93o C.
Machinery Loss of Profit Cover is an optional cover and not a
compulsory cover under the IAR policy.

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