Fire Insurance

Principles & Practice

Salient features
Fire insurance is designed to provide financial protection for property against loss or damage by fire & allied perils. Examples of insurable property are: Buildings Electrical installations Furniture fixture & fittings Machinery ,plant & equipment Goods in godowns,factories

CONTD
Cover granted by different insurance companies may vary though all of them will contain the terms & conditions of insurance contracts. Types of policies-standard fire & special perils policy , floater policy, declaration policy ,consequential loss policy, valued policies [only for curios paintings, subject to valuation certificate] Policies cannot be issued for a period exceeding 12months except for dwellings.

Standard fire & special perils policy

The insurer will indemnify the insured in respect of damage to the insured premises by: Fire ,lightning, explosion of gas in domestic appliances Bursting & overflowing of water tanks Flood, storm, typhoon ,tornado or cyclone Aircraft or articles dropped thereon Impact damage by rail or road vehicle Riot & strike ,malicious damage

Exclusions
Destruction or damage by explosion except as stated on the face of the policy. Good held in trust or commission, money, securities, stamps, manuscripts ,business books & so on. War & war like perils Earthquake Loss or destruction to any electrical apparatus caused by overrunning short circuit .This exclusion will apply only to that particular apparatus & not to other apparatus which may be damaged by fire so set up.

Contd
Loss by theft during occurrence of any insured peril. Excess under the policy-The first 5% of each & every claim subject to a minimum of Rs 10,000 in respect of Act of God perils like storm, cyclone, lightning.

Add on covers
Earthquake Loss of rent clause Removal of debris[ in excess of 1% of the claim amount] Architect &surveyor fees [in excess of 3% of the claim amount] Deterioration of stocks in cold storage due to accidental power failure, consequent to damage at the premises of power station due to an insured peril

Special Policies
Floater policy: It can be issued to cover stocks at various locations under one sum insured. Unspecified locations not allowed. Declaration policies are issued to take care of frequent fluctuations in stock or stock values. Basis of value for declaration is the market value. Declarations are on monthly basis. Refund of premium on adjustment based on the declarations shall not exceed 50% of the total premium. This policy is not issued for short period policies & for stocks undergoing process. Minimum sum insured is Rs 1 crore in one or more location

Contd
Reinstatement policy is the basic fire policy with reinstatement clause. It is issued in respect of buildings, plants &.machinery ,furniture. In these policies the element of depreciation is not taken into account. However sum insured should be equal to cost of reinstatement.

Consequential loss policy

Fire policy indemnifies material loss only, while this policy indemnifies the insured for loss of net profits, payment of standing charges, & expenditure in respect of increased cost of working. This policy is concerned with revenue loss. Claim is admissible under this policy only if the claim is paid under material damage policy. The loss is calculated by estimating figures of loss of profits based on reduction in turnover & on increased cost of working in maintaining its business.

Turnover
In this policy turnover is defined as the money paid or payable to he insured for goods sold & delivered & for services rendered in the course of business at the premises. It consists of 3 elements: Variable charges :These are expenses incurred in producing the goods which vary in direct proportion to the volume of business transacted. Standing charges: These expenses are fixed in amount irrespective of the volume of business like salaries, bank etc. Net profit: Turnover minus variable & standing charges. Gross profit: Net profit plus standing charges.

CONTD
Indemnity period: It could vary from 3 months to 3 years. It is influenced by the time that would be taken for replacement or reinstatement of machinery, stocks, etc. LOP policy provides indemnity in respect of loss of gross profits, during the indemnity period selected by the insured. Indemnity period & period of insurance are different. Insured peril must occur during the period of insurance which is a year. Indemnity period which commences after the accident extends beyond the expiry date of insurance. Sum insured should represent the gross profits of the indemnity period.

Impact of sept 11 attack on WTC

Almost 20% of $10 billion losses in WTC attack was due to Business interruption. Terrorism is no longer automatically under fire policies. It is an extension. Premium is now ceded to a terrorism pool. The per location cover is pegged at Rs 500 crores.

Fire underwriting
Earlier the rates were dictated by Tariff advisory committee. Now individual companies are free to quote their rates, depending on their company guidelines. Rating depends on: Construction of building, the type of flooring & the height of the building. Electrical wiring as fire may occur due to short circuit. Location: The degree of congestion in the area ,the distance from a fire brigade station.

CONTD
Occupancy: Whether it is a dwelling , godown or factory. Type of goods stored or manufactured [hazardous or non hazardous] Protection:. Fire extinguishers, hydrant system. Previous claim experience. Pre acceptance inspection by engineers appointed by the insured for industrial risks.

Claims procedure
Immediate notice of loss should be given to insurer. Insurer checks whether policy is in force & whether property affected is same as the one insured. Claim form is then issued. Surveyor is then deputed to assess the loss. If it is a huge claim then the surveyor issues an interim report & later a final report. Survey report contains the following important information-cause of loss, position in respect of compliance, salvage value, the amount of loss payable by the insurer. .Fire brigade report.

Contd
Average clause: It takes care of under insurance. If the insured has taken a policy for lesser amount than the actual value of property he will be deemed to be his own insurer for the amount of under insurance. Claim=insured amount/property value multiplied by actual loss. Agreed bank clause: In the event of a total loss, the insurer will pay the bank from whom the insured has availed the loan.

Miscellaneous Insurance
Burglary Insurance Business premises

Burglary Insurance
This policy is issued to business premises like factories, shops, & it can be given when fire policy is also taken. Property covered: Stock in trade Goods held in trust or on commission for which the insured is responsible. Furnitures & fixtures Cash: This cover operates only when it is kept in locked safe. It is subject to key clause. This clause state that he key should have been obtained by force or violence. Complete list of the cash in safe should be kept elsewhere.

CONTD
Excluded property: manuscripts , stamps, medals, bills of exchange etc. Insured Perils :Burglary by actual forcible entry. Theft by a person who breaks out by violent & forcible means. Damage to the premises by the burglars.

Exclusions
Loss or damage: Where insureds family member or staff is involved. By act of person lawfully on the premises (larceny or theft is not covered) Loss of cash by using a key unless key is obtained by violent means. Earthquake & other natural perils Riot strike & civil commotion (this along with terrorism can be granted on payment of additional premium). Consequent upon fire or explosion.

Types of policy
It can be issued on floater or declaration basis as is the practice in fire insurance. Specific policy for full value or on first loss basis. What is first loss basis?: Here the sum insured is taken as a percentage say 25 or 30% of the total value at risk. This is issued for bulk items ,heavy & for those items where total loss is impossible or remote. Condition of average is applicable to burglary policies also in case of under insurance. Rating depends on the nature of insured property, location of premises & safety measures ie watchmen, burglary alarm etc.

Claim procedure
Immediate notice of loss to insurers & the police. FIR has to be registered. Claims investigation requires a detailed examination of accounts, so, chartered accountants are usually appointed as surveyors. For fire claims it is either engineers or CAs. Normal practice is to make an on account payment for 75%,if the claim is admissible & release the balance 25% after the final investigation report is received. Letter of subrogation is taken from the insured at the time of settlement of claim.