Fire Insurance

B. Rajasekhar

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 Contract Law.

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

Risk ! Risk is the exposure to the chance of 

loss or injury ncertainty about the outcome U ncertainty If a loss is certain : there is no risk  Possibility Possibili ty that the outcome may be unfavorable  At least one of the possible outcomes should be undesirable

Ex : Parachute

Investment in a capital asset Physical depreciation is ceratain

Peril

and Hazard

Peril Is cause of loss

Hazard Is a condition that may create or increase the chance of a loss arising from a given peril  It increases increases the frequency and / or severity severity of the  peril 

 Ph Phys ysic ical al Hazard Hazard  Mo Mora rall Haza Hazard rd  Mo Mora rale le Haza Hazard rd

EU lements nconditional  M eeting

of a Valid Contract The value

of M inds

exchanged between the parties to the Contract 

Offer and

Acceptance

Insurance Agents while soliciting new business legally  are not offering to sell  Legal Capacity to insurance. They are only  enter into ato make an inviting the insured Contract  offer. ³Invitation to Treat´  Capacity

Consideration

Insured : Premium Promise follow the end ortointention  An  provisions and by stipulations in  permitted law  insurance contract  Anti-social purpose  the areInsurer legally : Contingent Promise unenforceable Legal Purpose

Insurance Contracts Exception : Policies are not 

Life, PA Distinguishing transferable automatically  Characteristics Reinstatement Policies to new owners Valued Policies M ore than one party may  Principle of Indemnity  Contract  have Personal an insurable interest  in the same property  The Policy and Proposal   Actual Cash Value : forms and other  Insurablefiled Interest  U tmost Goodfaith value Replacement documents at the Depreciation time of insurance forms Parties to the contract  one single  Actual Cash Value Entire and U ndivisible know in advance that  Contra proferentum the monies they will  exchange will be unequal   Aleatory Concept  Doctrine of Adhesion

Property

Triangle

 M ovable

/ 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   M echanically propelled Land Vehicle not on Rail  

Project

PROPERTY INSURANCE

MA RINE

FIRE

F LOP

CAR

DSU 

ENGINEE RING

EAR

CP M 

 ALOP  Project

Insurance

M B MLOP 

Insurance

CEC R

DOS 

EEI

BPV  

Fire 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

FIRE

INSURANCE

WHO WHAT  WHE RE  WHEN  HOW MU CH 

IS  COVE RED

IS  INDE MN   IFIED

SUM INSURED It is always fixed by the proposer  It is the limit of insurer¶s liability under the policy It is the amount on which the rate is applied to determine the premium payable for the insurance It should represent Actual Value at Risk of the property to be insured Over insurance results in higher premium outgo with no extra benefits Under Insurance results in application of  Condition of Average Declaration of Block-wise / Item-wise Sum Insured offers best results

How to Fix Sum Insured ? Buildings, Plant & Machinery Book Value Market Value Replacement Value / Reinstatement Value

How to Fix Sum Insured ? Stocks Raw Materials : Net Cost at which the materials are available to the insured on the date of  and at the place of loss Insured¶s own expenses of storage, interest and such other ³HOLDING CHARGES´ NOT to be included 

Finished Goods : Net M anufacturing Cost including Factory Overheads In other words, the M anufacturer¶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 M aterials + other inputs and processing costs at any given time

Structure of a Fire Policy Preamble or Recital Clause Operative Clause 12 Perils covered 13 General Exclusions 15 General Conditions 14 Add-on Covers

 FIRE  LIGHTNING  EXPLOSION  AIRCRAFT DAMAGE

FLEX A

 RIOT  STRIKE  M ALICIOUS DAMAGE  TERRORISM D AMAGE

RSMTD

 STORM  TEMPEST  FLOOD  INUDATION

STFI

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

Fire

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 U nder accidental circumstances as far as insured 

is concerned 

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

 FIRE  Excludes

destruction or damage caused to the

property insured by:

Its own  Fermentation  Natural Heating  Spontaneous Combustion  Its undergoing any Heating or Drying process  Burning of property insured by order of any Public Authority 

Limitations

to Explosion / Implosion

Excludes 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

:

Policy Excess Rs.

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

:

War group of perils Nuclear perils Pollution or Contamination : Excluding : 



Resulting from insured peril Insured peril resulting from pollution or contamination

Exclusions

:

Stocks in Cold Storage premises caused by change in temperature Architects, surveyors fees exceeding 3% of claim amount Debris Removal expenses exceeding 1% of the claim amount Loss of earnings , loss by delay, loss of  market and other consequential and indirect losses

Exclusions

:

Spoilage of materials caused by insured perils Loss by theft during or after operation of  insured perils Earthquake, 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 

Electrical 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 Property Unless      

specifically stated in the policy

Goods held in Trust, Bullion, curios etc above Rs. 10,000  M anuscripts etc., Securities, documents, M oney, Explosives

General Conditions 1. Policy voidable in case of misrepresentation, 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

General Conditions. 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. 4. If Insured property is insured by marine policy, Fire Insurance will cover the excess claimed amount , if any, after marine policy pays 5. Cancellation 6. Notice in writing to the Company reporting the loss within 15 days Law of Limitation : 12 months

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 10.  Average Clause 11. Contribution 12. Subrogation 13.  Arbitration 14.  All notices etc. in writing 15.

Reinstatement

after a loss

of Sum Insured

Policies

for Particular Considerations

Valued Policies Floater Policies

Declaration Policies Floater Declaration Policies

General Regulations: 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 Regulations: 7. Partial Insurance : No policy for only certain portions of a building ( excluding plinth and foundations ) No policy for only specified machinery, parts of machinery ( except 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 Regulations:

9. Loading 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%o 4.00%o

General Regulations:

10. Cancellation At the option of the Insured : short period scale If policy is replaced with same Insurer by Insurer  new annual one with identical property : 





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

Short Period Policies : applicable short period scale If policy is cancelled on account of Govt. order , Building-in-course of construction, Buildings pro--rata demolished : pro

At the option of the Insurer  : Pro Pro--rata

General Regulations: 11. Mid-term Increase in Sum Insured : Increase in SI : Pro-rata Decrease in SI : Short Period Scale

12. Escalation Clause : M ax. 2 5%

 Additional Prem. : @ 5 0 % of Tariff Rate For Buildings, P&M  only. Not for Stock 

General Regulations: 16. 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 Regulations:

17. FE A Discount For all detached or segregated blocks

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

19. Silent Risk : 30 days or more Storage rate or 1.00 %o whichever is higher  No Discounts for Silent risks No Silent Rates if a risk goes silent following a loss under the policy 

20. Voluntary Deductible Scheme

General Regulations:

21. Computation of Rate The following sequence shall be adopted for  computation of rate : 1.

Basic Rate

2.

5% reduction for Sprinklered blocks if applicable

3.

Reduction in rates for deletion of STFI & RS MT   D if opted out 

4.

Extra for µKutcha¶ 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

( Sect. III, IV, V, VI ).

Fuel

FIRE

TRIANGLE

Combustible Material