In House Training Program on

“Basic Course on General Insurance”

Venue: Head Office, Board Room

Fire Insurance Underwriting

Date: 15th September, 2014

Shahedul Haque
Assistant Vice President &
Head of Branch Control Department
Prime Insurance Company Limited

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 What is Fire?
The term fire has always implied the actual ignition of something
which ought not be on fire and is accidental or fortuitous so far
as the policy holder concerned.

These conditions must fulfill:

 Actual Ignition
 Something should be on the fire which ought to be on the
fire
 Fire should be accidental

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 So, the scorching or smoke damage caused by burning is not a fire
damage within the meaning of the fire policy.

 Willful act of the Insured is not covered, and

 When the fire is the result of a cause falling within an exception cause
of the contract are not treated as the Insurer’s liability.

But

• It is immaterial whether the fire is caused by the negligence of

servants, of stranger or the Insured himself do not exempt the
Insurers from liability.

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 Insurance Underwriting

The Term ‘Underwriting’ has several meaning. In the broadest sense, it refers
to the entire transaction of the Insurance business. Thus, Insurance
companies are referred to as ‘underwriters’. In a restricted sense
‘underwriting’ is the process of accepting or rejecting risks. If a risk is
acceptable, underwriting is further concerned with the fixing of rate of
premium and the other terms and conditions of the Insurance contract. In
this sense, the term ‘underwriter’ is used to indicate the man who conducts
the technical side of the business, i.e. that part of Insurance function which
deals with the acceptance of risks as distinct from other functions as
development of business, accounting, investment etc.

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Underwriting therefore deals with principles and practices concerning the acceptance or
rejection of risks, fixing of rates and terms, the total amount of acceptance, the amount
of retention for Insurers, own account and Re-Insurance of the balance amount.

The ultimate objectives of ‘Underwriting” are:

 The production of a large volume of premium income sufficient to maintain and

enlarge on Insurer’s organization.
 The earning of a reasonable profit on the Insurance Operations.

However above everything underwriter requires truthful and complete information

regarding a risk to evaluate the same. Without proper and accurate risk information an
underwriter is cannot do justice to his job. The required information for underwriting
may also make physical inspection of the risk or appoint a surveyor to report faithfully
the true and accurate position of the risk. The proposal form has a great role not only in
underwriting the risk but also through out the policy period.

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Proposal Form:

In Insurance a proposal form is a form provided by the Insurer, completed by

the person who requires Insurance coverage. This form gives the details that
the Insurer wishes to know about the proposed risk/contract. The prospective
client who submits a proposal form to an Insurer is called a proposer.

The proposal is the initial step in the process of negotiation between the
proposer and Insurer. The proposal is the basis of the contact between the
proposer and Insurer.

The main function of the proposal form is to record the information for the
Underwriter to assess the nature of the risk being proposed.

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Contents of a proposal form/Underwriters’ requirements:

 Full name of the proposer: This is required for identification. It may be an

individual, a company or a partnership. The name of any other interest may also
be stated.

 Proposer’s address: This is also required for identification. This address may be
different from its factory or workplace/office.

 Proposer’s Profession: The profession, occupation, nature of trade or business

of the proposer shall be stated.

 The full description of the property to be Insured with detail breakdown and value
of each item.

 Perils/risks to be covered (R&SD, Earthquake, Flood, Cyclone etc.)

 Any voluntary excess: Whether the proposer wishes to accept any excess of
loss.

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 Situation of the risk to be described elaborately i.e. to state:

 The name of the building.

 Owner of the building.

 Holding no. , Street Name and postal address.

 distance from nearest building.

 if adjunct to other building whether the division wall meet the standard of the
perfect party wall.

 construction details i.e. number of stories, wall, roof, floor and adjoining building
and construction within 50 feet.

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 Occupation of building floor wise and that of adjoining building.

 Lighting, heating and power management in the building.

 Storage situation.

 Experience of the proposer or his/her employees in the profession, trade &

business.

 Previous and present history of Insurance, any refusal to underwrite proposed risk
by any Insurance Company.

 Loss history in detail whether claim or not.

 Fire Fighting arrangement available in the premises and distance of nearest fire
station.

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 Declaration: Every Proposal Form contains a declaration to the effect that:
 The statement/answers given in the proposal form are true and nothing has
been concealed or misinterpreted.

 The proposer agrees to pay the premium as charged by the Insurer and
accept the standard policy terms and conditions of the company.

 The completed proposal form and the declaration by Insurer and shall be the
basis of the contract.

 The Proposal Form shall be duly signed, sealed, dated and

delivered by the proposer/related Bank.

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 Standard Fire Cover Note/Policy
Basic Risks Covered:

o
Fire
o
Lightning
o
Explosion of boilers or gas used for domestic
purpose only

These three basic perils are printed in standard fire

policy form and included in the basic fire premium.

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Exclusion:

The Fire perils exclude loss or damage caused by:

 Explosion resulting from Fire

 Earthquake or subterranean Fire

 Its own spontaneous fermentation or heating

 Its undergoing any heating process or any process involving

the application of heat.

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Special Perils:

 Explosion and Aircraft Damage

 Riot, Civil commotion and malicious damage
 Earthquake or Subterranean Fire
 Spontaneous Fermentation
 Strom or Flood
 Escape of water from any tank, apparatus or pipe
 Leakage of oil from any fixed oil-fired heating installation.
 Impact damage
 Sprinkler damage
 Subsidence, Ground Heave, Land slide

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General Exclusions:
 Damage occasioned by riot or civil commotion (unless bought back into
policy)

 Damage occasioned by war, invasion, act of foreign enemy, hostilities, civil

war, rebellion, revolution, insurrection, military or usurped power.

 Loss caused by destruction or damage directly or indirectly arising from

radioactive contamination.

 Sonic bangs.

 loss incurred by destruction or damage caused by pollution or

contamination.

 Terrorism Risks.

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The Fire Cover Note/Policy contains the following sections:
 The heading (Insurers Name, Registered address)
 Name and address of the Insured.
 Risk Situation or location.
 Perils to be covered (Fire, R&SD, Flood, Cyclone etc.)
 Sum-Insured details/breakdown
 Occupation of the Insured
 Cover Note/Policy period
 Premium Calculation/Computation
 The attestation clause (signature of the insurers authorized officer)
 The preamble or recital clause incorporating the proposal from, if any and reference
to the consideration.
 The operative clause (the operative clause details the cover provided the policy)
 The terms and conditions
 The Exclusion/deductibles
 The warranties.
 The Schedule (if any)

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Express conditions of implied conditions

Express conditions are printed on the policy form

Implied conditions are:

• That both parties have observed utmost good faith

• That the Insured posses an insurable interest

• That the subject matter of Insurance exists.

• That the subject matter of the Insurance can be identified

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General conditions will deal with such matters as:
 alternations which need to be notified

 Cancellation

 Claims procedure

 Fraud

 Provisions for the Insured to take care measure

 Subrogation

 Contribution

 Average

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Conditions are further clarified as:

o
Conditions precedent to the contract- those that operate before
the contract is formed-disclosure of material fact.

o
Conditions subsequent to the contract-those that operate offer the
contract is made such as alteration, cancellation etc.

o
Conditions precedent to liability-those which must be complied
with if the Insurer is to be liable to pay claims, these which must be
complied with if the Insurer is to be liable to pay claims, these
include conditions such as claims procedure, subrogation and
contribution, notice of loss to the Insurer etc.

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What is warranty:

A warranty is defined as an undertaking by the Insured that a certain

state of affairs will or will not continue, or that something shall or shall
not be done, throughout the duration of the contract.

What is condition:

The condition will make it clear that any warranties which apply will do
so throughout the period of Insurance and that any non-compliance
which decreases the risk of damage will allow the Insurer to avoid any
claim.

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 Hazard

The term ‘Hazard’ in Insurance language refers to those conditions or features

or characteristics which create or increase the chance of loss arising from a
given peril. A though knowledge of various hazards to which property to
which property and persons are exposed is most essential for successful
underwriting.

Hazards can be classified ‘physical’ and ‘moral’. Physical hazard refers to the
material features of the subject matter of Insurance, whereas moral hazard
may arise from human weakness (e.g., dishonesty, carelessness, etc.) or from
general economic and social conditions.

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Types of Hazard:

Physical Hazard
Physical hazard can be assessed from the information given in a proposal form. It can be
better ascertained by a survey or inspection of the risk. The following are some
examples of physical hazard in Fire Insurance:

 Construction: Construction refers to the building materials used in walls and

roof. A concrete building is superior to a timber building.

 The Height: The greater the number of stories, the greater the hazard because
of difficulties of fire extinguishment. Besides, the greater the number of floors
involve the risk of collapse of the upper floors causing heavy impact damage.

 Nature of flooring: Wooden floors add fuel to fire. Besides wooden floors
collapse easily in the event of fire, causing damage to property on lower floors
through falling machinery or goods from upper floors.

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 Occupancy: The occupancy of a building is the purpose for which it is used.
Three types of hazards arises from occupancy. Building in which chemicals
are produced or used in a large quantity involve a considerable ignition
hazard. A timber yard presents a high combustibility hazard because once a
fire starts timber burns quickly. The contents may be highly vulnerable to
damage in the event of fire. For example: paper, clothing etc. are vulnerable
not only to fire damage but also to damage by water, heat etc.

 The process of Manufacturer: The process of manufacture involving the

use of electricity increases the risk of Fire. If work is carried during the night,
the fire hazard is increased due to the use of artificial lights, continuous use
of machinery which leads to friction and likely carelessness of workers due to
fatigue.

 Situation: The location in a congested are, exposure of more hazardous

adjacent premises, distance from the fire brigade are examples of locational
physical hazard.

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Moral Hazard

Moral Hazards indicates those dangers/risks which relates to character, integrity

and mental attitude of the Insured. These are not visible and cannot be
identified or ascertained by mere inspection of the risk or the subject-matter of
Insurance. The examples of moral hazards are:

 Dishonesty: An insured taking Insurance coverage with deliberate intention

of creating or taking a loss to collect a claim. This is an example of very bad
moral hazard. Sometimes even an honest Insured may be tempted to stage a
loss if he happens to be in financial crisis.

 Carelessness: This occurs in some Insured as they think that since their
properties is protected by Insurance they may not exercise the necessary
care for their properties. Poor Housekeeping or maintenance in
manufacturing risk are example of bad moral hazard.

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 Difficult Insured: This sort of moral hazard arises when claims occur. An
Insured may not deliberately bring about a loss but once a loss occurs he/she
would resort to demanding unreasonable high compensation without regard
to Insurance Principle.

 Industrial Relation: Employer-Employee relationship may involve an

element of bad moral hazard. Lack of understanding and co-operation
between the employer and employees may result in labour unrest leading to
carelessness, malicious damage even to arson and sabotage.

 General Economic Condition: During the time of economic depression

Insured may be tempted to cause deliberate loss in order to overcome the
resultant difficulties.

Besides the above Night Work, Electrical Installation, Artificial Light may also
aggravate the hazard.

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 Difference between Physical & Moral Hazards:

 Physical hazards relates to the subject-matter of Insurance, whereas, moral

hazard relates to the character, integrity & mental attitude of the Insured.

 Physical hazards can be seen, assessed and rated accordingly, but moral
hazards cannot be seen, assessed or rated accordingly.

 Whilst physical hazards can be effectively dealt with by applying excess,

franchise, loading or other conditions, moral hazards cannot be easily
checked or controlled by such methods. Cautions & selective underwriting is
the only possible solution.

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Prime Insurance Company Limited

w w w. p r i m e - i n s u ra n c e . n et
Question session

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