Meaning, Characteristics or nature, Significance, Principles, Scope of Fire Insurance

A fire insurance is a contract to indemnity, to the insured for destruction of or damage to properly caused by fire. The insurer undertakes to indemnify the insured against loss due to fire caused to the property insured against, not in excess of the maximum amount stated in the policy. A contract of fire insurance is essentially a contract of indemnity, and not against accident, but against loss caused by fire. For example, if a person has insured his house of Rs. 1.00 lakh against loss by fire, the insurer is not liable to pay the sum, unless the house is destroyed by fire, but actual loss subject to the maximum limit of Rs. 1.00 lakh.

Meaning of Fire in contract of Insurance

The word fire means “loss by fire” and in literal sense means a fire which has broken bounds. Therefore, fire which is used for ordinary domestic purposes or even for manufacturing is not fire. ‘Fire’ is fire insurance must have the following two features:

1. Production of Ignition light and heat

According to Justice Boyles (in Everett V/s London Ass. Co. 1895) “Fire means the production of light and heat by combustion and unless there is actual ignition, there is no fire within the meaning of the term in ordinary policy.”

Heating unaccompanied by ignition is not fire. “Loss or damage” occasioned by fire means loss or damage either by ignition of the articles consumed or by damage either by ignition of the articles caucused or by ignition of that part of the premises, where the article is. In one case there is loss, in the other case, a damage occasioned by fire. Thus, it can be stated that no claim possible without flame.

In the following cases, the loss by fire is not considered:

Loss of goods by excessive heat due to the closure of doors and ventilations.
The damages of goods due to heavy humidity.
Changes of particles (Sugar) in liquidity form due heavy sun shines.
Evaporation of items by chemical reactions or heat.
Damage of articles due to heavy temperature.
Damage by explosive provided the explosion causes no actual ignition.
Damage from lightning provided it does not cause actual ignition.
Loss or damage by earth quake, riot, military power or civil commotion.
Damage to uses of articles as a result of smoke without flame.
The loss or damage caused by electricity.

All these situations do not fall under the definition of ‘fire’ and therefore to the loss due to such things do not be covered by the fire insurance policy.

The losses by the following instances or losses subsidiary to fire are as follows:

Damage which occurs as a result or smoke or of putting out the fire would be covered by the fire risks.
Any loss resulting from apparently necessary and bona fide efforts to put out a fire, whether it be by spoiling goods by water or throwing articles of furniture out of window, are covered by the fire risks.
Even by damages to a neighboring house by explosion done for the purpose of arresting fire, would be covered by the fire risks.
Every loss directly or if not directly at least consequently resulting from the fire is within the policy (In Stanley V/s Western Ins. Co., 1968).
Loss the theft during a fire is covered as a fire risk (In Stanley V/s Bailey, 1831).
Even loss by fire caused by the insured’s negligence is covered by the policy (IN Harris V/s Poland, 1941).
Any loss occured while putting out the fire.

2. Fire by accident

In the case of fire insurance, the occurrence of fire is accidental, then only it is covered by the policy. In case the fire is the deliberate act of the insured, the insurer is not liable to compensate. The fire which is used for ordinary domestic purposes or even for manufacturing is not fire as long as it is confined within the usual or proper limits. Thus, fire by accident means the production of light and heat by combustion and with actual ignition and heating unaccompanied by ignition is not fire.

Characteristics or Nature of Fire Insurance

It is a means of security against risk of fire on any material or property.
It is an indemnity contract.
The insurer undertakes to indemnity the insured against actual loss subject to the maximum limit of sum insured.
It is a contract of utmost good faith, the insurer and the insured must disclose all material facts relating to the subject matter of insurance.
A fire insurance policy is usually issued for one year only with the option to the parties to nenew it for a further period on payment of stipulated premium.
If the property is insured with more than one insurer and on loss by fire, all the insurers are called upon to contribute towards the claim.
The insurer is not liable for payment of my claim if the fire is caused deliberately.
In British Law, the fire insurance policies can be assigned only with prior permission of the insurer, but under Indian Law the consent of the insurer is not necessary to make valid assignment of policy, only a notice of information is sufficient.
On occurrence of fire, a notice of fire should be given to the insurer so that the insurer may take prompt steps forth with to safeguard his interests, in dealing with salvage and also judge the cause and nature of fire, and be extent of the loss.
It is the duty of the insured to act as a man of ordinary prudence to take necessary steps to save the property from loss of fire, as in the absence of any insurance against the property.
Sometimes, the insurer issues a ‘Cover Note’ or ‘Interim Policy’ to the insured. In the case of loss by fire before the Absolute Policy is issued, the claim is paid in view of ‘Cover Note’.
The risk commences as soon as the insurer accepts the proposal, but the insurer has the right to fix the date of commencement of risk at a future date also.
The rate of premium varies according to the degree of hazard or risk involved.
It is becoming very common in fire insurance policies to insert a condition called the ‘average clause’ by which the insured is called upon to bear a portion of the loss himself. The condition is called the pro-rata condition of average.
The insured must have insurable interest in the subject matter both at the time of affecting the policy and at the time of the loss.
The word fire refers to “loss by fire”.
In consequential loss policy, the insured is indemnified for the loss of profits which he sustains through interruption or cessation of his business as a result of fire.
In case of loss by fire, is more than once, the indemnity can be claimed. However, the total claim shall not be more than the sum assured.
Fire Insurance is also based upon certain principles, viz, insurable interest, utmost good faith and principle of indemnity etc.
Fire Insurance is different from life insurance and marine insurance. It is an indemnity insurance where as life insurance involved the elements of security and investment. In marine insurance, insurable interest must be present at time of loss, but in fire insurance, insurance, insurable interest must be present at the time of affecting the policy as well as of the time of loss, both.

Significance of Fire Insurance

The industry, trade and commercial articles have been developing and diversifying at faster rate in India. Along with the growth of industrial and commercial articles the infrastructural fields like transport, communication, finance, advertising, stock marketing etc., have also been developing continuously so as to cope with the pace of economic development. The importance of foreign trade also has been very much for a developing country like India. All these developments in various fields brought in much risks and uncertainties in business activities. Insurance is the only fields that provide security, against business risks. The role of the fire insurance has been increasing day-by-day as a means against destruction or damage of business property caused by fire.

The significance of fire insurance can be discussed under the following points:

As a source for minimizing losses: Fire can destroy property in goods and fixed assets of core of rupees or can create damages to the business property. Fire Insurance indemnifies losses or damages done to fire and resources the mental worries of businessmen.
Decreases in probabilities of fire losses: The increasing uses of energy petrol like electricity, gas and other such items have increased the probability of losses or damages to goods and property. In order to minimize this calamity, various type of fire extinguishing devices have been destroyed throughout the world. Moreover, the fire insurance is another device to indemnity the losses thus removes mental worries by extending financial support.
Increase in production of fire proof materials: Fire Insurance cannot prevent occurrence of fire, but can reduce the losses. Today various devices are produced in the country like fire extinguisher. Fire brigades are set up at every cities and towns to extinguish fire by the government and local bodies.
Decrease in social loss of fire: Social awareness has been created in the country to put out fire and to reduce the effect of fire. The social organizations provide training to the people in the use of the fire extinguishing devices and caution them in the use of such items which causes or produces fire.
Asset valuation: Assets are valued for obtaining a fire insurance policy. it requires the insured to be more cautious in protecting his property or goods.
Loss preventing efforts and advice by the insurer: An insurer not only indemnity against fire losses, but also advises the insured to reduce the incidence of fire. Fire Insurance companies establish, ‘salvage corps’, to extinguish fire so that the extent of loss can be minimized.
Helpful in business progress: Due to the facilities provide by the fire insurance companies, the business enterprises undertake large scale production and invests in business and marketing activities without any botheration. This lead to continuous progress in industrial and commercial activities, leading to economic growth.
Beneficial for new industries: The new industrial units usually face complex problems of production, finance, competition and sales etc. In such a situation, they cannot afford the losses/damages due to fire. The fire insurance relieve such entrepreneurs from worries by indemnifying the loss/damages, if any, from the occurrence fire.
Credit facility: Where the assets are secured by fire insurance, it becomes easier for such enterprises to get credit from banks and other financial institutions. This will increase the credit worthiness of the enterprise.
Distribution of risks: Fire insurance is an effective device to distribute the risks in a group, enabling the individual or the institution to maintain its efficiency.
Other importance: They include the following:

Development of small industries becomes easier.
Contribution towards timely completion of national plans.
There will be regularity in national income and the ways for national development.
There can be continuity in the production program of business enterprises and the operating e fficiency will increase.

Important Principles of Fire Insurance

1. Insurable Interest

In the case of fire insurance, the insured must have insurable interest in the subject matter both at the time of affecting the policy and at the time of loss. In the case of goods, insurable interest arises on account of ownership, possession and control. Ownership only be absolute or limited. It may be legal or equitable. In the case of immovable property such as insurance of buildings may be affected by any one interested in them. The owner can always insure. The principle of insurable interest requires that the insured must have an actual interest in the subject matter of insurance. The insured must be “so situated with regard to the things insured that he would have been benefited by its existence, loss from its destruction.” (In Lucena V/s Crawfored, 1806). Any person may be said to have an interest in the subject matter of insurance who may be injured by the risks to which the subject matter is exposed.

2. Utmost Good Fath

A contract of insurance is a contract based on utmost good faith and if the utmost good faith is not observed by either partly, the contract may be avoided by the other. Since insurance transfers risks from one party to another, it is essential that there must be the utmost good faith and frankness between the insured and the insurer. The whole truth must be disclosed about the subject matter of insurance and all circumstances surrounding it, in order that underwriters may know the extent of his risk and how much he must charge for the insurance. The willful or innocent withholding of any relevant information is a most serious matter, and the insurer can declare the contract void on discovering the truth. This obligation to make full and true disclosure applies to all type of insurance such as life insurance, marine, fire etc. In the case of fire insurance the insured should act in good faith in all the matters such as presenting the claim for payment and similarly act as a man or ordinary prudence when there is a fire by taking necessary steps to put out the fire so that the extent of loss could be minimized.

3. Principle of Indemnity

A contract of fire insurance is a contract of indemnity. This means that the assured in the case of loss against which the policy has been made shall be fully indemnified but subject to a limit of the policy. The insurer undertakes to indemnify the insured what the actually loses by the happening of the event upon which the insurer's liability is to arise, and in no case is the insured entitled to make a profit of his loss.

In addition to the liability of actual loss, the insurer also undertakes to bear the consequential loss the policy, for the loss profits which the insured sustains through interruption or cessation of his business as a result of fire.

Scope of Fire Insurance

The scope of fire insurance is much wider. This can be understood from Section 2 of Indian Insurance Act, 1938. According to this provision, the scope of fire insurance involves the following types of risks.

The risks directly involved by fire.
The risks indirectly involved (that have been traditionally included within the fire insurance policy).

For the convenience of study, the scope of fire insurance can be classified on the following basis:

1. Ordinary Scope

Before May, 2000 three types of fire insurance policies (A, B and C policies) were issued in India. Therefore, the scope of fire insurance policies is classified on these criteria. After May, 2000, only single type of fire insurance policy is issued in India by fire insurance companies, which is known as "Standard and Special Peril Policy". The policy covers the following types of perils:

Perils covered

Loss caused by fire: (a) Excluding loss, destruction or damage caused to the property insured by - (i) its own spontaneous fermentation of halting, or(ii) its under going any heating or drying process. (b) Burning of property insured by order of any Public Authority.
Lightening.
Explosion/Implosion: Excluding loss, destruction or damage caused to the property insured by bursting of boilers (other than domestic boilers), economizers or other vessels in which steam is generated, machinery or apparatus subject to centrifugal force.
Aircraft Damage: Loss, destruction or damage caused by aircraft, other aerial or space devices and articles dropped there from excluding those caused by pressure waves.
Riot Strike, Malicious and Terrorism: Visible physical loss, destruction or damage by external violent means caused to the property insured but excluding those caused by: (1) Total or partial cessation of any process or operations or commission of any kind; (2) Confiscation, commandeering, requisition or destruction by order of the Government or any lawfully constituted authority. (3) Permanent or temporary dispossession of any building or plant or unit or machinery resulting from the unlawful occupation by any person of such building or plant or unit or machinery or prevention of access to the same.
Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and Inundation.
Impact Damage: Impact by any rail/road vehicle or animal by direct contact not belonging or owned by - (1) The insured or any occupier of the premises, or (2) Their employees while acting in the course of their employment.
Subsidence and Land slide including Rock slide: Loss, destruction or damage caused by subsidence of part of the site on which the property stands or land slide/rock slide excluding. (1) The normal cracking, settlement or bedding down of new structures; (2) The settlement or movement or made up ground; (3) Coastal or river corrosion; (4) Defective design or workmanship or use or effective materials; and (5) Demolition, construction, structural alternative or repair of any property or ground works or excavations.
Bursting and/or overflowing of water tanks, apparatus and pipes.
Missile Testing operations.
Leakage from Automatic Sprinkler Installations: Excluding loss, destruction or damage caused by: (1) Repairs or alterations to the buildings or premises; (2) Repairs, removal or extension of the sprinkler installation; and (3) Defects in construction known to the Insured.
Bush Fire: Excluding loss, destruction or damage caused by forest fire.

Conclusion

The general conclusions arrived from the above description are that the losses arising out of the following risks do not come under purview of the fire insurance:

Losses due to by the acts of the God/Natural calamity.
Losses arising out of war attacks (declared war or otherwise).
Loss/damage out of poultry effects.
Damage to goods stored in cold storage due to fluctuations in temperature, etc.

2. Special Scope, and

Certain special kind of risks is also included in the fire policy. By paying extra premium, the insured can include such special risks as given below within the scope of fire insurance policy:

The fees paid to the architect, surveyor or consultant engineer, if such fees exceed more than 3 percent of the claim money.
The expenses incurred in connection with removal of wastages from the construction site, if that amount exceeds more than I per cent of the claim money.
Loss to the goods kept in the cold storage due to fluctuations in electricity / power but within the causes stated in the policy.
Loss arising out of earth- quake, fire of combustion.
Forest fire.
Loss due to falling the goods from fork lifts, or form own vehicle of the insured etc.
Loss due to spontaneous combustion.

3. Comprehensive Scope

Almost all the insurable risks are included in the comprehensive scope of fire insurance. It includes not only the ordinary and direct risks, but also the consequential losses. This way the following risks are included within the comprehensive scope.

Risks of standard policies.
Special risks which can be insured by paying extra rate of premium.
Excluded perils in the standard policy.
Consequential losses or risks arising consequent to fire.

The first three types of risks have been discussed in the ordinary scope of fire insurance and now the consequential losses/risks are discussed below:

Consequential losses: The consequential losses/risks are those have been created by the fire. Such risks are also known as "Loss of Profit" loss. When fire takes place in a factory, not only its assets/properties (machine, raw material, finished goods, building, etc.) are damaged or lost, but the production work in the factory also held up for a considerable time. Consequently, the profits from the factory is stopped, but burden of fixed costs and additional expenses also are to be borne. Thus, the following types of losses are included in consequential losses:

Loss of net profit.
Loss of fixed expenses, e.g., salaries to employees, building rent, interest on loans, etc.
Increased cost on account of problems arising out of fire.
Rent of the building taken on hire, till the time on getting the damaged building repaired or renovated, etc.

All these types of losses can be included in the Comprehensive Scope of fire insurance policy, the premiums of such policies are much higher than the ordinary policies.