FIRE INSURANCE

Introduction to Fire Insurance

• In India, insurance has a deep-rooted history. It finds mention in the writings of Manu
( Manusmrithi), Yagnavalkya (Dharmasastra) and Kautilya (Arthasastra). The writings talk
in terms of pooling of resources that could be re-distributed in times of calamities such as
fire, floods, epidemics and famine. This was probably a pre-cursor to modern day
insurance.
• The history of general insurance dates back to the Industrial Revolution in the west and
the consequent growth of sea-faring trade and commerce in the 17th century. It came to
India as a legacy of British occupation. General Insurance in India has its roots in the
establishment of Triton Insurance Company Ltd., in the year 1850 in Calcutta by the
British. In 1907, the Indian Mercantile Insurance Ltd, was set up. This was the first
company to transact all classes of general insurance business.
• 1957 saw the formation of the General Insurance Council, a wing of the Insurance
Association of India. The General Insurance Council framed a code of conduct for
ensuring fair conduct and sound business practices.
• In 1968, the Insurance Act was amended to regulate investments and set minimum
• In 1972 with the passing of the General Insurance Business (Nationalisation) Act, general
insurance business was nationalized with effect from 1st January, 1973. 107 insurers were
amalgamated and grouped into four companies, namely National Insurance Company Ltd.,
the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United
India Insurance Company Ltd. The General Insurance Corporation of India was incorporated
as a company in 1971 and it commence business on January 1sst 1973.
• Thus this millennium has seen insurance come a full circle in a journey which has extended
nearly 200 years
• The history of Fire Insurance can be traced to the XVI century. The Great Fire of London
(1666) destroyed more than 13,000 houses and displaced about 100,000 people but it took a
couple of decades for its embers to spark the first blaze of the fire insurance business.
Nicholas Barbon was probably the first to recognize the potential of a fire-threat protection
business, establishing the first fire insurance office near the Royal Exchange in 1681. The
imaginatively named ‘The Insurance Office for Houses on the Backside of the Royal
Exchange’ was a mutual scheme for house insurance, guaranteed by a property investment
fund.
• The trust deed allowed Barbon’s firm to insure up to 10,000 houses. However, despite its
charming name, it went out of business in around 1710. ‘The Friendly Society for Securing
Houses from Loss by Fire’ faired somewhat better, entering the scene in 1683 and issuing
23,000 policies before its demise in 1730. It wasn’t until the launch of the Hand-in-Hand in
1696 that a fire insurance business with longevity took a firm foothold. This was followed by
the Sun Fire Office in 1710, the Union in 1714, the Westminster in 1717, the London in 1720,
What is Fire Insurance?
• Fire insurance is a contract under which the insurer in return for a
consideration (premium) agrees to indemnify the insured/assured for
the financial loss which the Insured may suffer due to destruction of
or damage to property or goods, caused by fire, during a specified
period.
• Thus the basic ingredients of Fire Insurance are as follows:
• The financial loss should be on account of fire resulting in damage or
destruction of property or goods.
• The maximum amount which the Insured can claim as compensation in the
event of loss is agreed to between the parties at the time of entering into the
contract.
• It should be understood here that the event that results into financial
loss would be fire and not accident. Secondly the financial loss
resulting from damage to a property may be much more than the sum
assured. In such case the Insurer would be liable to make payment of
the sum assured only.
• For example, if a person has insured her house for Rs.10.00 lakh
against loss by fire, the insurer is not liable to pay the full sum, unless
the house is destroyed by fire, but only pay the actual loss subject to
the maximum limit of Rs. 10.00 lakh.
Who can take the policy?
• Any person / firm / organization / institution who may suffer financial
loss in the event of operation of insurable perils may insure such
property under the fire policy. The pertinent point is that such
person/firm/organization/institution must have an “Insurable
Interest” i.e. a financial benefit, financial stake or advantage arising
out of the property.
• For the purpose of Insurance, including Fire Insurance, the following
persons have insurable interest in the subject matter:-

• a) Owners of Building and contents therein such as house hold articles,

furniture etc.
• b) Shop Keepers
• c) Educational/ Research Institutions.
• d) Hotels, Boarding and Lodgings, Hospitals, Clinics or such service providers
• e) Industrial and Manufacturing Firms.
• f) Godown Keepers.
• g) Bailees, Lesser, Lessee, Banks, Financial Institutions, Mortgagors,
Mortgagees.
• h) Traders in stocks
• i) Trustees, Charitable Institutions
• j) Transporters and C & F Agents.
Can Fire Insurance Policy be assigned?
• A fire insurance policy cannot be assigned (i.e. the legal rights or liability of
the contract cannot be transferred to any other third party/ individual
apart from the ones who had initially entered the contract) without the
permission of the insurer because the insured must have insurable interest
in the property at the time of contract as well as at the time of loss.
• The insurable interest in goods may arise out on account of
• ownership,
• possession, or
• contract
• A person with a limited interest in a property or goods may insure them to
cover not only his own interest but also the interest of others in them.
Meaning of Fire and Loss or Damage by Fire
• The word fire literally means a condition of burning and is used in
popular sense to mean friendly fire used for manufacturing or
domestic purpose.
• In Insurance fire means only hostile fire in a place where it has broken
bounds.
• Fire in this sense means:
• There must be actual fire or ignition
• It must be accidental or fortuitous in origin so far as insured is concerned.
• The phrase 'loss or damage by fire' also includes the loss or damage
caused by efforts to extinguish fire.
Principle of Causa Proxima (Proximity
Clause)
• In order to establish a claim under a fire insurance policy it will not be
sufficient to prove that the loss is attributable to fire. It will also be
essential to prove that the fire must be the efficient proximate cause
for the loss.
• In other words the fire must not be the immediate cause or dominant
factor and not the remote or the distant cause.
• This is in terms of Principle of Causa Proxima.
Procedure for taking Fire Insurance Policy
• A person desirous of taking a Fire Insurance Policy should follow the following steps:
• A. Selection of Company
• As a first step the fire insurance company with which the insurance is to be effected
must be identified.
• B. Proposal Form
• Once the Insurance Company has been selected the next step is to fill the proposal
form which forms the basis of the contract.
• The proposal Form would require the following details to be filled up: ƒ
• Name and Address of the Proposer
• Nature of Business
• Details of Asset to be Insured
• Type of Fire Insurance Policy ie Specific Policy, Comprehensive Policy, Valued Policy ƒ
• Current Market Value of the Asset
• Amount for which the Insurance is to be taken.
• C. Evidence of Credibility
• The Insurance Company may check the credentials of the proposer to establish his
credibility and ensure that he has not been involved in any unscrupulous activity.
• D. Survey of the Property
• The next step in Fire Insurance is to take the survey of the property proposed to be insured
by qualified experts known as Surveyors. The Surveyors are to inspect the property
carefully and to estimate the degree of risk involved. It is on this basis of this report of the
Surveyors that the Insurance Company accepts or rejects the proposal and quotes the rate
of premium.
• E. Acceptance of Proposal Form
• On the basis of the proposal and the report of the Surveyor the Insurance Company would
accept or reject the proposal.
• F. Commencement of Risk
• The next step is to pay premium. Once the premium is paid the coverage of risk would
commence.
• G. Cover Note
• The Insurance Company may accept risk unconditionally or subject to certain conditions
and may give provisional protection to the Insured by a document known as Cover Note.
• H. Policy
Types of Losses covered by Fire Insurance
are:
• The following losses have been held to be caused proximately by fire:
• Loss which is the necessary consequence of fire in the sense that had there
been no fire it would not have happened.
• Loss which is reasonable and probable consequence of fire in that it results in
ordinary course of event from the happening of fire.
• Loss caused by water used to extinguish fire, destroying property or by Fire
Brigade in the execution of their duties.
• Loss arising as a consequence of removal of property from the building in
which fire in ranging with the intention of saving it or loss due to theft during
the confusion caused by fire.
• Wages paid to persons engaged in extinguishing fire.
Losses not covered by a fire insurance policy
• In determining the extent of liability of the Insurer, the cause of fire is
immaterial unless it has been deliberately brought about by the
Insured.
• Thus the claim of Fire Insurance will not be admissible if the fire is
caused by the wilful act of the Insured or by someone else acting in
concert with him.
• Following are the losses that are not covered by the Fire Policy:

• Loss due to fire caused by earthquake, invasion, act of foreign enemy,

hostilities or war, civil strife, riots, mutiny, martial law, military rising or
rebellion or insurrection.
• Loss caused by subterranean (underground) fire.
• Loss caused by burning of property by order of any public authority.
• Loss or damage to property caused by its own fermentation or spontaneous
combustion e.g. exploding of a bomb due to an inherent defect in it.
• Loss or damage by lightening or explosion is not covered unless these cause
actual ignition which spread into fire.
Procedure in the Event of Loss
• In case of occurrence of fire resulting in loss the following procedure should
be followed:
• Intimate such loss / damage immediately so that a Competent Surveyor may be
deputed to assess the loss.
• Give an account of all properties damaged or destroyed with estimated amounts
having regard to their values as on the date and place of loss.
• Cooperate with surveyors by providing all the necessary documents for assessment
of loss and establishing liability.
• Cooperate with the insurer in all their activities of entering the premises, taking
possession of properties, their examining, sorting, removing or selling to your
account, without prejudice.
• Inform particulars of all other insurances existing on the property at the time of
loss.
Documents required by insurer for processing
the claim:
• In the event of fire and loss resulting thereon the following
documents have to be submitted to the Insurance Company by the
Insured:
• A. Common Documents for all claims under a Standard Fire and
Special Perils Policy:
• Certified True copy of the policy along with schedule and
endorsements/clauses.
• Claim Form.
• Newspaper reports on the incident, if any.
• Photographs.
• Past claims experience
• B. For Fire Claims the following additional documents have to be submitted:
• Fire Claims (additional documents)
• Report of the Internal Committee constituted for the purpose of investigating the
cause of fire.
• Fire Brigade Report.
• First Information Report / Letter of intimation to the Police Station duly endorsed /
Police Panchnama.
• Forensic Laboratory Report on samples collected at affected site.
• Drug Inspector's Report on destruction of Drugs/ Pharmaceutical items (for claim on
pharma products only).
• Final Investigation Report.
• Action taken on the suggestion of TAC/ LPA on loss minimisation of prevention.
Scope of Fire Insurance
• The properties/assets that can be covered under Fire Insurance are as follows:
• a. All moveable/ immoveable properties of the proposer on land (excluding
those in transit) broadly categorised as follows:
• i. Building (including plinth and foundations, if required):
• Whether completed or in course of construction (excluding the value of land).
• Interiors, Partitions and Electricals.
• ii. Plant & Machinery, Equipments & Accessories (including foundations, if required)
• Bought Second hand
• Bought New
• Obsolete Machinery
• iii. Stocks
• Raw Material
• Finished Goods
• In process
• In trade belonging to Wholesaler, Manufacturer and Retailer
• b. Other Contents such as
• i. Furniture, Fixtures and Fittings
• ii. Cables and Pipings
• iii. Spares, Tools and Stores
• iv. Household goods, etc.
• c. Specific Items such as bullion, unset precious stones, curios, work
of arts, manuscripts, plans, drawings, securities, obligations or
documents, stamps, coins or paper money, cheques, books of
accounts, computer system records, explosives.
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.
• 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
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
• 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.
• 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