Fire Insurance

B. Rajasekhar

What is Insurance ?What is Insurance ?

Legal Definition :Insurance is a contractual arrangement whereby one party agrees to compensate another party for losses

Insurance is a branch of Insurance is a branch of Contract LawContract Law.

Financial Definition :Insurance is a financial arrangement that redistributes the costs of unexpected losses.

Insurance PoolInsurance Pool

Risk !Risk !

Risk is the exposure to the chance of loss or injury

Uncertainty about the outcomeIf a loss is certain : there is no riskPossibility that the outcome may be unfavorableAt least one of the possible outcomes should be undesirable

Ex : ParachuteInvestment in a capital asset Physical depreciation is ceratain

Peril and HazardPeril and Hazard

PerilIs cause of loss

HazardIs a condition that may create or increase the chance of a loss arising from a given peril

It increases the frequency and / or severity of the peril

• Physical Hazard• Moral Hazard• Morale Hazard

Elements of a Valid Elements of a Valid ContractContract

Offer and Acceptance Consideration

Capacity Legal Purpose

•Unconditional•Meeting of

Minds

Insurance Agents while soliciting new business

legally are not offering to sell insurance. They are only

inviting the insured to make an offer.

“Invitation to Treat”

•The value exchanged between

the parties to the Contract

Insured :•Premium

•Promise to follow the provisions and stipulations in

the insurance contractInsurer :

Contingent Promise

•Legal Capacity to enter into a

Contract

•An end or intention permitted by law

•Anti-social purpose are legally

unenforceable

Insurance ContractsInsurance ContractsDistinguishing CharacteristicsDistinguishing Characteristics

Principle of Indemnity

Insurable Interest

Actual Cash Value

Doctrine of Adhesion

Personal Contract

Utmost Goodfaith

Entire and Undivisible

Aleatory Concept

Policies are not transferable

automatically to new owners

The Policy and Proposal forms and other

documents filed at the time of insurance forms

one single contract Parties to the contract know in advance that the monies they will

exchange will be unequal

Exception :•Life, PA

•Reinstatement Policies•Valued Policies

More than one party may have an insurable

interest in the same propertyActual Cash Value :

Replacement value - Depreciation

Contra proferentum

Property TriangleProperty Triangle Movable / Immovable Animals / Insects / Birds / Fish Crop / Plantation

On Land Off Shore In Space In Course of Construction / Installation

While kept / Installed / Stored In Transit by Rail / Road / Water / Air Mechanically propelled Land Vehicle not on Rail

FLOP DSU

MLOPALOP

PROPERTY INSURANCE

FIRE MARINE

ENGINEERING

CAR EAR CPM MB EEI BPV

DOSCECR

Project Insurance

Project Insurance

Fire PolicyFire Policy

Is Location Specific

Is a Named Perils Policy

Cause of Fire is immaterial

Covers certain Non-Fire Damages

Spirit is to indemnify Direct Loss / Damage

WHO

WHAT

WHERE

WHEN

HOW MUCH

IS COVERED

IS INDEMNIFIED

FIRE INSURANCEFIRE INSURANCE

SUM INSUREDSUM INSURED

It is always fixed by the proposerIt is the limit of insurer’s liability under the policyIt is the amount on which the rate is applied to determine the premium payable for the insuranceIt should represent Actual Value at Risk of the property to be insuredOver insurance results in higher premium outgo with no extra benefitsUnder Insurance results in application of Condition of AverageDeclaration of Block-wise / Item-wise Sum Insured offers best results

Book Value

Market Value

Replacement Value /

Reinstatement Value

How to Fix Sum Insured How to Fix Sum Insured ??

Buildings, Plant & MachineryBuildings, Plant & Machinery

How to Fix Sum Insured How to Fix Sum Insured ??

StocksStocksRaw Materials :Net Cost at which the materials are available to the insured on the date of and at the place of lossInsured’s own expenses of storage, interest and such other “HOLDING CHARGES” NOT to be included

Finished Goods :Net Manufacturing Cost including Factory OverheadsIn other words, the Manufacturer’s Ex-Factory Price less Administrative / Sales Overheads and Net Profit

Goods in Bonded Warehouse :Sum Insured to include Excise Duty

Imported Goods :Contract Price

Stock-in-process :Cost of Raw Materials + other inputs and processing costs at any given time

Structure of a Fire Structure of a Fire PolicyPolicy

Preamble or Recital Clause

Operative Clause

12 Perils covered

13 General Exclusions

15 General Conditions

14 Add-on Covers

FLEXA

• FIRE

• LIGHTNING

• EXPLOSION

• AIRCRAFT DAMAGE

RSMTD

• RIOT• STRIKE• MALICIOUS DAMAGE• TERRORISM DAMAGE

STFI

• STORM• TEMPEST• FLOOD• INUDATION

OTHERSOTHERS

• IMPACT DAMAGE• SUBSIDENCE, LANDSLIDE• BURSTING and/or overflowing of water tanks, apparatus & pipes• missile testing operations• Leakage from automatic sprinkler installations• Bush fire

Fire MeaningFire Meaning

To be understood in its ordinary popular sense

There should be actual ignition of insured property

Which ought not to have been on fire

Under accidental circumstances as far as insured is concerned

The word Fire as used in the Fire The word Fire as used in the Fire Insurance policy covers the following Insurance policy covers the following

contingencies:contingencies:

Smoke, Scorching, Heat, Toxic Gases, Ash

Water or other fire extinguishing appliances used in putting out fire

Acts of Fire brigade in execution of its duties

Falling of wall as a result of fire

During removal from a burning building, caused by exposure to weather, the removal being made to mitigate the loss

Other Limitations to Other Limitations to “FIRE”“FIRE”

Its own Fermentation Natural Heating Spontaneous Combustion

Its undergoing any Heating or Drying process Burning of property insured by order of any Public Authority

• Excludes destruction or damage caused to the property insured by:

Limitations to Limitations to Explosion / ImplosionExplosion / ImplosionExcludes destruction or damage caused to

Boilers

Economizers or

Other vessels in which steam is generated

by their own explosion / implosion

Machinery or apparatus subject to centrifugal force

• However, destruction or damage caused to the domestic boilers by explosion / implosion is covered

Exclusions :Exclusions :

Policy ExcessPolicy ExcessRs. 10,000 for each and every loss

In case of AOG PERILS :5% of each and every loss subject to a minimum of Rs. 10,000

The excess shall apply per event per insured

However, for DWELLINGS : NO EXCESS

Exclusions :Exclusions :

War group of perils

Nuclear perils

Pollution or Contamination :

Excluding :• Resulting from insured peril• Insured peril resulting from pollution or

contamination

Exclusions :………Exclusions :………

Stocks in Cold Storage premises caused by change in temperatureArchitects, surveyors fees exceeding 3% of claim amountDebris Removal expenses exceeding 1% of the claim amountLoss of earnings, loss by delay, loss of market and other consequential and indirect losses

Spoilage of materials caused by insured perilsLoss by theft during or after operation of insured perilsEarthquake, Volcanic eruption or any other convulsions of nature Insured property removed from the insured premises

Equipment temporarily removed for repairs, cleaning, renovation or other similar purposes for a period of 60 days are covered

Exclusions :………Exclusions :………

Electrical ExclusionElectrical Exclusion

Loss or damage to any electrical machine, apparatus, arising from or occasioned by : over running excessive pressures, arcing, short circuiting, overloading, electrical surge etc.

this exclusion applies to the particular machine, apparatus

but not to other machines which may be destroyed

by fire so set up.

Excluded PropertyExcluded Property

Unless specifically stated in the policy

Goods held in Trust, Bullion, curios etc above Rs. 10,000 Manuscripts etc., Securities, documents, Money, Explosives

General ConditionsGeneral Conditions

1. Policy voidable in case of mis-representation, mis-description or non-disclosure

2. Policy will expire after 7 days from the date of fall of any building – if not caused by insured peril.

If the insurer expressly agrees to cover : the cover continues

3. Under the following circumstances the

insurance ceases :• Alteration of trade to increase the hazard• Insured building unoccupied by for more than

30 days• Interest in the insured property passes from

the insured other than by will or operation of law

General Conditions…….General Conditions…….

4. If Insured property is insured by marine policy, Fire Insurance will cover the excess claimed amount, if any, after marine policy pays

5. Cancellation6. Notice in writing to the Company

reporting the loss within 15 daysLaw of Limitation : 12 months

General Conditions…….General Conditions…….

7. Company’s right to enter the premises, take possession of the property

8. Fraud, willful act : policy void

9. Reinstatement option : • as circumstances permit• Reasonably sufficient manner• Sum Insured is the Limit• Because of any law, if the Reinstatement could not be done,

payment in money

General Conditions……General Conditions……

10. Average Clause

11. Contribution

12. Subrogation

13. Arbitration

14. All notices etc. in writing

15. Reinstatement of Sum Insured

after a loss

General Conditions……General Conditions……

Policies for Particular Policies for Particular ConsiderationsConsiderations

Valued Policies

Floater Policies

Declaration Policies

Floater Declaration Policies

3. Long-term Policies : for ‘Dwellings’ only

4. Mid-term Cover : For STFI & RSMTD : Specific advice with payment of additional premium in Cash or by Draft only Entire Property. No Selection Cover starts 15 days after receipt of Premium Premium on Short Period Scale

5. No Installment facility. Premium in full.

6. Minimum Premium : Rs. 100/-, Rs. 50/-

General RegulationsGeneral Regulations::

General RegulationsGeneral Regulations::

7. Partial Insurance :No policy for onlyonly certain portions of a

building( excluding plinth and foundationsexcluding plinth and foundations )No policy for onlyonly specified machinery,

parts of machinery ( except Boilersexcept Boilers )

Note : In case of different interests : Full interest.

Clearly defined in the policy.

8. Short Period Scale Extension of short period policies not permitted.

General RegulationsGeneral Regulations::99. . Loading for ‘Kutcha’ ConstructionLoading for ‘Kutcha’ Construction

Walls and / or Roofs of :• Wooden planks

• Thatched leaves, Grass, Hay

• Bamboo

• Plastic cloth, Asphalt Cloth

• Canvas, Tarpaulin

Loading : Additional rate of 4.00%o4.00%o

General RegulationsGeneral Regulations::10. Cancellation10. Cancellation

At the option of the Insured : • short period scaleshort period scale

If policy is replaced with same Insurersame Insurer by new annual one with identical propertyidentical property :

• Pro-rata on SI replaced• Short Period on SI not replaced

Short Period Policies : applicable short period scaleIf policy is cancelled on account of Govt. order, Building-in-course of construction, Buildings demolished : pro-ratapro-rataAt the option of the Insurer : Pro-rataPro-rata

General RegulationsGeneral Regulations::

11. Mid-term Increase in Sum Insured :Increase in SI : Pro-rataDecrease in SI : Short Period Scale

12. Escalation Clause :Max. 25%Additional Prem. : @50% of Tariff RateFor Buildings, P&M only. Not for StockFor Buildings, P&M only. Not for Stock

General RegulationsGeneral Regulations::16. Claims Experience Discount /Loading16. Claims Experience Discount /Loading

Min. SI : Rs. 50 Cr. ( Sec. IV,V,VI,VII )All property in one compound, one complex, one location Preceding 36 months excluding the expiring policy period.On renewal : either by existing or new insurer

When certified claims experience by respective insurers is not available - Provisional loading of 15%.

General RegulationsGeneral Regulations::17. FEA Discount17. FEA Discount

For all detached or segregated blocks

Sections : III, IV, V, VI, VII ( except Floater / Floater Declaration policies )

19. Silent Risk : 30 days30 days or more Storage rate or 1.00%o whichever is higher

No DiscountsNo Discounts for Silent risks

No Silent Rates if a risk goes silent following a loss under the policy

20. Voluntary Deductible Scheme

General RegulationsGeneral Regulations::21. Computation of 21. Computation of

RateRateThe following sequence shall be adopted for computation of rate :

1. Basic Rate

2. 5% reduction for Sprinklered blocks if applicable (Sect. III, IV, V, VI ).

3. Reduction in rates for deletion of STFI & RSMTD if opted out

4. Extra for ‘Kutcha’ construction ( on 1-2-3 )

5. Discount / Loading for Claims experience ( 1-2-3-/+4 )

6. FEA Discount on protected blocks (1-2-3-/+4 )

7. Discount for voluntary deductibles on the total premium calculated on the basis of final rate worked out as above

FuelCombustible Material

Oxy

gen

Air

Heat

Ignition

FIRETRIANGLE