Fire Insurance – Definition, Characteristics and Policy Types

Fire insurance is the oldest form of insurance. In the early development of industrial society, fire was the main source of energy. The industrial or commercial activities were not possible without fire. However, there was a need to insure the risk of uncontrolled or uncertain fire. Fire insurance is designed to provide for financial loss to property due to fire and a few other related hazards. The property that can be covered under fire insurance includes Building, Machinery, Equipments, Accessories, Goods, Raw Materials, Electrical Installation of building, Residential houses, Furniture and fittings, Pipelines located outside and inside the building.

A contract of fire insurance is a contract whereby the insurer undertakes, in consideration of the premium paid, to make good any loss or damage caused by fire during a specific period. The fire insurance contract specifies the maximum amount which the assured can claim in case of loss. This amount is fixed by the parties at the time of the contract. It is, however, not the measure of the loss. The loss can be ascertained only after the fire has occurred. The insurer is liable to make good the actual amount of loss not exceeding the maximum amount fixed by the parties.

“Fire insurance is a contract between the insurer and the insured whereby the insurer undertakes to indemnity the insured for destruction of or damage to the properly caused by fire or other specified perils during an agreed period of time, in return for payment of a premium in lumpsum or by installments”.

Fire Insurance Policy

Characteristics of Fire Insurance Contract

  1. It is a contract of indemnity. The assured can, in the event of loss, recover the actual amount of loss from the insurer. This is subject to the maximum amount for which the subject-matter is insured.
  2. It is a contract of uberrimae fidei. The assured and the insurer have to disclose everything which is in their knowledge and which will affect the contract of insurance.
  3. The assured must have insurable interest in the subject-matter both at the time of insurance and at the time of loss. The insurable interest must be capable of valuation in terms of money.
  4. The risk covered by a fire insurance contract is the loss resulting from fire or some cause which is the proximate cause of the loss.
  5. It is subject to the principles of subrogation and contribution.
  6. It is a contract from year to year. It comes to an end after the expiry of the year. It can, however, be renewed if the assured pays the premium during the days of grace.

Formation of Fire Insurance Contract

A contract of fire insurance is entered into by the process of a proposal by one party and its acceptance by the insurer. The proposal is made in writing by filling up a printed form, and paying the premium or a part of it to the insurer. On receipt of the proposal and premium, the insurer issues a deposit receipt usually called a cover note. Subsequently if the proposal is accepted, the insurer issues a regular policy.

Average Clause in Fire Insurance Policy

The subject-matter of the fire insurance may be over-insured or under-insured. Over-insurance is automatically checked. In case of loss, the insurer is liable to pay the actual amount of loss, subject to the maximum amount for which the policy is taken. For example, where a building worth 5,00,000 USD is insured for 8,00,000 USD and is completely destroyed by fire, the insurer is liable to pay only 5,00,000 USD. Where the fire causes only a partial loss to the property insured, the assured is entitled to recover the full amount of loss provided that amount is covered by the policy. For example, where a building worth 2,00,000 USD is insured for 1,00,000 USD and half of it is destroyed by fire, the assured can recover 1,00,000 USD, since it is covered by the amount of the policy.

To save premium, people generally under-insure their property. It is rare in case of fire to property that the whole of it would be completely destroyed. Thus whereas the insurer would fix a relatively small premium he would have to pay the full extent of loss in case of partial loss. To protect themselves against under-insurance, the insurers usually insert a ‘subject to the average clause’ in the fire policy. The effect of this clause is that the assured can only recover such proportion of the actual loss suffered as the sum insured bears to the total value of the insured property. The assured in such a case is considered his own insurer for the difference in the actual value of the subject-matter and the value for which it is insured.

Example: Property worth 1,00,000 USD is insured for 80,000 USD. The policy contains an average clause. If half of the property is burnt down, the assured can recover only 40,000 USD. This is worked out as follows:

Sum to be recovered = (Value of the policy/Full value of subject-matter) x Actual loss

In this case, Sum to be recovered = (80,000/1,00,000) x 50,000 = 40,000 USD.

But for the average clause in the policy, the assured could recover the full amount of Rs.50,00 (i.e. half of Rs.1,00,000).

Insurable Interest

In case of fire insurance, the assured must have insurable interest in the subject-matter both at the time of the contract and at the time of the loss. Every person has insurable interest in the goods or property equal to the pecuniary interest he has in it.  The following persons have insurable interest in the subject-matter of insurance in the case of fire policy: (a) owner, (b) mortgagee or pledgee, (c) insurer, (d) pawn-broker, (e) Office Receiver or Assignee in insolvency, (f) warehouse man as regards goods of the customer, (g) wharfinger, (h) common carrier, (i) commission agent, and (j) trustee.

Causa Proxima

In actions on fire policies, if the proximate cause of loss is fire, the loss is recoverable. If it is not fire, but some other cause remotely connected with fire, the loss is not recoverable unless specifically provided for. Thus loss caused by explosion is not covered by a fire policy unless explosion actually causes ignition which spreads into fire. A fire policy usually covers loss by explosion incidental to fire. But the insurer may specifically exclude his liability in which case he cannot be sued if a fire occurs after explosion and causes damage.

The following losses are causes proximately by fire:

  1. Loss which is the necessary consequence of fire in the sense that if there had been no fire it would not have happened.
  2. Loss which is a reasonable consequence of fire in that it results in the ordinary course of events from the happening of fire.
  3. Loss caused by water used to extinguish fire destroying property or loss caused due to the efforts made to arrest or extinguish fire.
  4. Loss arising as a consequence of removal of the property from the building in which fire is raging with the intention of saving it, or loss due to theft during the confusion caused by the fire. 

Rights of Insurer

The insurer under a fire policy has the following rights:

  1. Right of avoiding the contract for no-disclosure or concealment of any material fact.
  2. Right of control over the property.
  3. Right of entering the property.
  4. Right of subrogation.
  5. Right to salvage.
  6. Right of reinstatement.
  7. Right of contribution.

Types of Fire Insurance Policies

  1. Specific Policy: It is a policy which covers the loss of the assured up to a specific amount which is less than the real value of the property. Specific policy is a case of under-insurance. To check under-insurance, the insurers usually insert average clause in the policy in which case the policy is known as average policy.
  2. Comprehensive Policy: It is a policy which covers losses against risks like fire, theft, burglary, third party risks, etc. Such a policy is also known as “all-in-one” policy. It may also cover loss of profits during the period the business remains closed due to fire.
  3. Valued Policy: It is a policy in which the amount payable in case of loss is fixed at the time the policy is taken. In the event of loss, the fixed amount is payable irrespective of the actual amount of loss. A valued policy can be legally challenged because it is not a contract of indemnity.
  4. Floating Policy: It is a policy which covers property at different places against loss by fire. It might, for example, cover goods lying in two warehouses at two different places. It is always subject to average clause.
  5. Replacement or Reinstatement Policy: In order to prevent fraudulent devices by the assured, the insurers usually insert a clause in the policy, called the re-instatement clause, whereby the insurer undertakes to pay the cost of the replacement of the property damaged or destroyed by fire. 

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