2.1.

Types of Fire Insurance Policies

The different type of Fire Insurance Policies is as follows:

A. Specific policy
A specific policy is a policy which insures the risk for a fixed amount.
Under this Policy the Insurer will pay the actual loss or the Insured
amount whichever is less.

In this policy the value of the property has no relevance in arriving at the
liability.
B. Valued Policy
In such a policy a fixed amount is paid as compensation irrespective of the
loss. This type of policy violates the principle of Indemnity and can be
legally challenged, at the time of loss the market value of the property is
not taken into consideration.
C. Average Policy
A fire policy containing an average clause is called Average Policy. An
average policy requires the insurer to pay that proportion of actual loss as
the Insurance bears to the actual value of the property at the time of loss.

Example: If the actual value of the property is Rs 10,00,000 and the same
is insured for Rs 8, 00,000 and loss on account of fire is Rs 2,00,000. In
such case the Insured will get
8,00,000 X 2,00,000 = 1,60,000
10,00,000

The balance of Rs 40,000 shall be borne by the Insured himself.

However if the insured amount is equal to the value of the property or

more than that he will get compensation of the entire loss i.e. Rs 2,00,000.

D. Floating Policy (Floater Policy)

This policy covers loss by fire caused to property belonging to the same
person but located at different places under a single sum and for one
premium. Such a policy might cover goods lying in two warehouses at
two different locations. This policy is always subject to 'average clause’.
E. Comprehensive policy
This is also known as 'all in one' policy and covers risks like fire, theft,
burglary, third party risks, etc. It may also cover loss of profits during the
period the business remains closed due to fire.

F. Replacement or Re-instatement policy

In this policy the insurer inserts a re-instatement clause, whereby he
undertakes to pay the cost of replacement of the property damaged or
destroyed by fire. Thus, he may re-instate or replace the property instead
of paying cash. In such a policy, the insurer has to select one of the two
 alternatives, i.e. either to pay cash or to replace the property, and
afterwards he cannot change to the other option.

2.1.1. Features of Fire Insurance

Fire insurance also is governed by the Principles of Insurance. The main
principles are the Principle of Indemnity, Principle of Utmost Good faith and
Principle of Deliberate Act. The main features are listed below:
a. Offer & Acceptance
It is a prerequisite to any contract. Similarly, the property will be
insured under fire insurance policy after the offer is accepted by the
insurance company.

Example: A proposal is submitted to the insurance company along with

premium on 1/4/2014 but the insurance company accepted the proposal
on 15/4/2014. The risk is covered from 15/4/2014 and any loss prior to
this date will not be covered under fire insurance.

b. Payment of Premium
An owner must ensure that the premium is paid well in advance so that
the risk can be covered. If the payment is made through cheque and it
is dishonored then the coverage of risk will not exist. This is given in
section 64VB of Insurance Act 1938.

The insurance cover is valid only after the premium has been paid by
the assured or buyer of the policy.

c. Contract of Indemnity
Fire insurance is a contract of indemnity and the insurance company is
liable only to the extent of actual loss suffered. If there is no loss, there
is no liability even if there is fire.

Example: If the property is insured for Rs. 70 lakhs under fire

insurance and it is damaged by fire to the extent of Rs. 20 lakhs, then
the insurance company will not pay more than Rs. 20 lakhs.

d. Utmost Good Faith

The property owner must disclose all the relevant information to the
insurance company while insuring their property. The fire policy shall
be voidable in the event of misrepresentation, miss description or non-
disclosure of any material information.

Example: The use of building must be disclosed i.e. whether the

building is used for residential use or manufacturing use, as in both the
cases the premium rate will vary. Thus, if a building is declared to be
for residential use and is later damaged by fire
 due to manufacturing activities being pursued in the said building; the
insurer can declare the policy as void.

e. Insurable Interest
The fire insurance will be valid only if the person who is insuring the
property is owner or having insurable interest in that property. Such
interest must exist at the time when loss occurs. It is well known that
insurable interest exists not only with the ownership but also as a
tenant or bailee or financier. Banks can also have the insurable interest.

Example: Mr. Anand is the owner of a building. He insured that

building and later on sold the building to Mr. B and the fire took place
in the building. Mr. B will not get the compensation from the insurance
company because he has not taken the insurance policy being an owner
of the property. After selling to Mr. B, Mr. A has no insurable interest
in the property.

f. Contribution
If a person insured his property with two insurance companies, then in
case of fire loss both the insurance companies will pay the loss to the
owner proportionately.

Contribution = Sum assured with individual insurer x Total loss

Total Insurance
For Example: Mr. Basu insured a building against fire with three fire
insurance companies ABC, xyz, and Lmn.

Abc and xyz with Rs. 30,000/- Rs. 40,000/- and Rs. 30,000/- each.

A fire damaged the building during the term of the policy, and a total
loss of Rs. 60,000/- was evaluated. The contribution from Abc, Xyz
and Lmn shall be as under:

Contribution of Abc Company = 30,000 x 60,000 = 18,000

1, 00,000

Contribution of Xyz Company = 40,000x x 60,000 = 24,000

1, 00,000

Contribution of Lmn Company = 30,000x x 60,000 = 18,000

1, 00,000
g. Period of fire Insurance
The period of insurance is to be defined in the policy. Generally the
period of fire insurance will not exceed one year. The period can be
less than one year but not more than one year except for the residential
houses which can be insured for a period exceeding one year also.

h. Deliberate Actions
If a property is damaged or loss occurs due to fire because of deliberate
act of the owner, then that damage or loss will not be covered under the
policy.

i. Claims
To get compensation under fire insurance the owner must inform the
insurance company immediately so that the insurance company can
take necessary steps to determine the loss.