Meaning of fire insurance
Fire insurance refers to protection provided by the insurance company against the risk of fire. It is a contract in which the insurance company promises to pay a certain sum of money for the loss caused by fire during a specific period of time in consideration for the payment of premium to be paid by the insured.
According to R.S Sharma,” An agreement whereby one party in return for consideration undertakes to indemnify the other party against the financial loss of certain subject matter being damaged or destroyed by a fire up to an agreed amount.”
Fire insurance contract doesn’t minimize or prevent the risk of fire but it is only compensation against loss caused by fire. The need for fire insurance was felt in England during the mid 16th century when 1/3 of England was destroyed by fire. For covering the loss against the risk of fire the following two conditions must be compulsorily fulfilled:
- There must be actual fire.
- The fire should be accidental.
If heat or smoke without ignition of fire causes damage to the subject matter it is not included under fire insurance thus fire insurance has certain features which are as follows:
- Fire insurance is a contract of indemnity thus the insured cannot make claim more than the property lost or the insured amount.
- The principle of subrogation is applicable in fire insurance so, after payment of compensation, the right of the insured is transferred to the insurer.
- Fire insurance can be done for a period of 1 year which can be renewed according to need.
- There must be utmost good faith between the insured and the insurer while taking fire insurance.
- The claim made by the insured can either be settled in cash or by repairing the damaged property.
- The fire caused by fraud is not included under fire insurance thus the insurance company can deny the claim. However, negligence of the insured causing fire is included under fire insurance, etc.
Procedures for taking a fire insurance
When a person intends to take a fire insurance policy he or she also has to follow a certain process and steps that have been briefly discussed below:
A) Selection of insurance company
There are various insurance companies available which insures the risk of fire. Thus, the very first step for taking fire insurance starts with selecting a particular insurance company. The proposal must evaluate the financial condition and select that company which has a good name and fame along with least formalities for taking fire insurance.
B) Proposal form
After selecting the insurance company the prospective policyholder should fill up an application form that can be obtained from the same insurance company. The proposal form includes various matters to be filled up by the proposer regarding himself and his property the proposal form may include:
- Name and address of the proposer
- Income and occupation of the proposer
- Amount of insurance
- Nature of the subject matter of insurance.
- other necessary information.
C) Evidence of respectability
This is the stage where the insurance company investigates the background of the proposer. This is done because sometimes it has been found that the policyholder themselves intentionally damages the subject matter and asks for a claim. Thus here the insurance company evaluates the character and reputation of the proposer. However, if the insurance company knows the proposer this step is not necessary.
D) Survey of property
At this stage, the insurance company through the help of its employees and surveyor makes evaluation of the property. They evaluate its market price, the risk involved, nature of the property….etc. This plays an important role in fire insurance because the survey report submitted by the surveyor to a large extent decides whether the insurance company will accept the proposal or not.
E) Acceptance of proposal
On the basis of the information’s provided by the proposer facts about their background and the report submitted by the surveyor if satisfied the insurance company accepts the proposal. After acceptance of the proposal now it issues an acceptance letter in the name of the proposer notifying him or her about acceptance of the proposal and also makes the demand for the payment of a certain period.
F) Issue of cover note
Having received the acceptance letter the proposer now has to pay the stated amount of premium. Against the payment of premium, the insurance company issues a receipt which is called a cover note. Once the premium is paid the risk is insured. This cover note acts as evidence of fire insurance until the issue of the fire insurance policy.
G) Issue of fire insurance policy
After fulfilling all formalities when the insured pays the premium finally the insurance company issues the fire insurance policy. This policy contains all the terms and conditions of insurance and facts about the policy like the type of property insured, subject matter of insurance amount of premium, risk covered, insured amount, date of issue and expiry of the policy, etc.
Types of fire insurance policy
Insurance companies offer different types of fire insurance policies to the person intending to take fire insurance having different terms and conditions. Some of the major types of fire insurance policies include the following:
A) Valued policy
Under, a valued policy the value of the subject matter of insurance is agreed at the time of taking an insurance policy. Since the value of the subject matter is determined before that fixed amount is only compensated by the insurance company in case of damage caused by fire. Here the market value of the property doesn’t affect the sum payable. Generally, the valued policy is taken for such subject matter whose amount of loss cannot be determined after damage like artistic goods, paintings…etc.
B) Average policy
The average policy is taken in order to punish under insurance. This policy contains the average clause which means the compensation paid by the insurance company against loss is reduced if the insured does insurance less than the value of the property. For e.g. MR A insured his property for Rs 5 lakh but the value of his property is 7 lakh 50 thousand now if he suffers a loss of 2,50,000 then due to average clause the compensation Is minimized and is calculated as:
C) Specific policy
This policy specifies the insured amount without an average clause. Under this policy, the insurance company indemnifies the amount of loss up to a specific amount i.e. insured amount. Here, full compensation is paid to the insured against the subject matter lost. However, in case the loss is more than the specific amount then the excess loss is not compensated. In our above example when there is a loss of 2, 50,000 under this policy full compensation of 2,50,000 is paid by the insurance company.
D) Floating policy
Under floating policy single policy covers the stock i.e. maintained at various places that are in different houses or in transit. This policy is taken by that businessman who maintains different levels of stock at different places. Here, the premium is paid on the basis of the average value of stock maintained and the compensation is paid on the basis of the actual stock damaged. An average clause is applicable in floating policy also so, there are no chances of under insurance.
E) Excess policy
The excess policy is taken by those types of a businessman whose value of stock or quantity of stock keeps on changing frequently. In such a situation also it becomes difficult to calculate the Insured amount. Thus under it, the insured takes two policies at a time i.e. one for minimum stock and another for excess stock. The excess value of a stock is calculated every month and is informed to the insurance company. The premium is also paid on the basis of the excess value of the stock. If the loss is less than the minimum value the first policy covers the risk and if the loss is more than the minimum value the excess [policy covers the risk.
F) Declaration policy
When a person takes a declaration policy the insured has to declare in advance the maximum value of a stock that he expects to have in the future. A provisional premium has to be paid on 75% or 3/4th of the declared amount. Now, the actual value of a stock is calculated every month and is reported to the insurance company based on which the insurance company calculates under or overpayment of premium. If it is found that there is an underpayment of premium then the outstanding amount has to be repaid to the insurance company but if there is an overpayment of premium then the excess premium paid is refunded by the insurance company.
G) Replacement policy
Under this policy, the insurer promises to pay the cost of replacement for the property damaged by fire. Here, the insurer doesn’t compensate in cash but it replaces the damaged property with the new property so this policy is also called as new for old policy. The amount of replacement to be paid by the insurance company depends upon the market price of the property.
H) Comprehensive policy
The policy is taken to insure the property against various risks like the risk of fire, earthquake, flood, riots, terrorism…etc. is a comprehensive policy. Under the comprehensive policy, the insured has to pay a high rate of premium because it covers multiple risks. The comprehensive policy thus is also called an all in one policy and all-risk policy.