Module 4

Fire Insurance

Fire insurance is property insurance that covers losses or damage to a structure damaged or destroyed in
a fire.

Coverage Details of Fire Insurance

Building Coverage: This covers the physical structure of the home or building, including walls, roofs, and
floors damaged by fire.

Contents Coverage: It covers the loss of personal belongings or business inventory due to fire. This can
include furniture, electronics, appliances, and other valuable items.

Additional Living Expenses (ALE): For homeowners, fire insurance may cover the costs associated with
having to live elsewhere if the home is uninhabitable due to fire damage.

Liability Protection: If a fire on your property spreads and causes damage to neighboring properties, the
liability component of your fire insurance can help cover those claims.

A fire insurance policy will not cover losses related to fires set deliberately.

Standard Fire Policy (SFP)

The SFP serves as a foundation for most fire insurance contracts, providing coverage against losses
caused by fire. It is a widely recognized and accepted form of insurance, serving as the foundation for fire
insurance policies across the industry. Although it is called the "standard" fire policy, it is essential to
note that specific terms and conditions may vary among insurance companies and jurisdictions.

Key Features of the Standard Fire Policy

1 - Insurable Interest

The SFP requires the insured party to have an insurable interest in the insured property. The policyholder
must possess a financial stake in the property, such as ownership or a contractual relationship. Insurable
interest ensures that policyholders do not obtain insurance for properties in which they have no legitimate
claim.

2 - Peril Coverage

The SFP typically covers losses from fire and lightning and limits other perils, including explosions,
smoke damage, and windstorms. Policyholders must review their specific policy to understand the perils
covered and any exclusions that may apply.

3 - Property Coverage

The SFP covers the property, including the building structure and contents. The policy may specify
whether coverage is provided on a replacement cost basis (where the insurer pays for the full cost of

bony varghese | Al Azhar Law College | 3 year LLB 1

repairing or replacing the damaged property) or an actual cash value basis (where depreciation is factored
into the reimbursement amount).

4 - Exclusions

While the SFP covers a range of perils, it is equally important to be aware of its exclusions. Common
exclusions may include losses resulting from war, nuclear events, intentional acts, and acts of government
authority. Reviewing the policy carefully to understand the specific exclusions applicable to one's
insurance coverage is crucial.

5 - Indemnity Principle

The SFP follows the principle of indemnity, meaning that the policyholder is entitled to reimbursement
for the loss suffered up to the policy's limits. The insurance company is not liable to pay more than the
value of the damaged property or the sum insured, whichever is lower. This principle prevents
policyholders from making a profit from the insurance claim.

6 - Insured's Duties

The SFP outlines certain obligations for the insured party to ensure a smooth claim process. These may
include notifying the insurer promptly, providing documentation and evidence of the loss, and taking
reasonable steps to mitigate further damage.

Proximate Cause – Nearest Cause not the Remote Cause

The principle of "proximate cause" in fire insurance is a fundamental concept that helps determine
whether a loss or damage is covered by the insurance policy. It involves identifying the primary or most
immediate cause of an event or loss to decide if it falls within the scope of coverage. It aids in
determining how the loss or damage occurred and whether it was caused by an insured peril or not. The
key element to remember here is that the proximate cause is the only one that is the closest in proximity
and not the distant cause.

In fire insurance, certain perils are clearly stated (known as insured perils), while others are excluded
(known as an exclusion). This means some perils are covered while others may not be. It is not always
clear whether the loss was caused by a single insured or uninsured peril. When an insured peril is
followed by an uninsured peril, an uninsured peril follows an insured peril, or both occur concurrently-
the situation becomes more complicated. The proximate principle aids in the resolution of such situations
by allowing the insurer to determine whether a claim is payable or not, and if so, to what extent.

According to the proximate clause, there should be a succession of events that result in some outcome. It
should work actively on a fresh and independent source without the use of any force.

It is the policyholder's responsibility to establish that an insured peril generated some losses or damages.
If the insurer wishes to deny the claim, they must demonstrate that the peril (which caused the damages)
is on the exclusion list.

The principle of proximate cause helps ensure that insurance claims are assessed based on the root cause
of the loss rather than remote or unrelated events.

bony varghese | Al Azhar Law College | 3 year LLB 2

However, the interpretation of proximate cause can sometimes be a matter of legal dispute, and courts
may be involved in settling such disputes if there is a disagreement between the policyholder and the
insurer.

Mr. Atul Rajan purchased a fire insurance coverage for his home's furniture but did not get a policy
covering electronic equipment. One day, a fire broke out in his building, causing frequent electricity
fluctuations. As a result, his refrigerator broke down after a few days. He then filed a claim through the
fire insurance policy. However, the claim got rejected and he was left disappointed.

This was because the insurer asserted 'breakdown' as the proximate cause, rather than fire and his fire
insurance policy did not cover 'breakdown-related' risks . As Mr. Atul became more selective in his
coverage, the insurer became more selective in paying claims as well.

The escalation clause in fire insurance

An "escalation clause” is a provision commonly found in insurance policies that allows for an automatic
adjustment or increase in the coverage limits and premiums over time. This is done typically to keep pace
with inflation or changes in the value of insured property. This clause helps ensure that the policy
provides adequate coverage as the cost of replacing or repairing insured property increases due to factors
such as inflation or changes in market value. This is the reason why the escalation clause is also called the
inflation-guard endorsement in the insurance business.

Claim Fire Insurance

A fire insurance policy should ideally be claimed right after the insured property has experienced fire
damage.

Step-1: Inform the Insurer

If you do not have any funds to deal with the losses, then you can ask for available financial assistance
from your insurance company for immediate actions such as vacating the place, temporary
accommodation, etc.

Step 2: Estimate the Total Losses and Damages

In order to file a claim, you must provide enough proof and evidence to the insurance provider. Not only
that, but you also need to provide the closest possible estimate of the total damage you have sustained.

Step 3: Raise a Claim

Coming to the most important step: filing the fire insurance claim. Most of the reputed insurance
companies allow you to make claims online. All you need to do is visit the official website, fill out the
fire insurance claim form, and submit all the required proofs and documents.

Step 4: Investigation By the Insurance Company

Once your claims settlement application is received, the insurance company sends an appointed surveyor
to verify the claim request and estimate the actual loss or damage the insured property has suffered.

bony varghese | Al Azhar Law College | 3 year LLB 3

The surveyor will investigate the entire case and create a report that plays a major role in determining the
claims settlement amount. It is recommended to keep all the policy-related documents in place as they can
be used for the investigation.

Step 5: Final Settlement

After going through the report submitted by the surveyor, the insurance provider will provide you with a
settlement amount as per the terms and conditions of your policy.

But this is not the end. If you are not satisfied with the compensation or have any other issue, you can
raise a complaint to get it resolved before closing the claim.

Doctrine of Subrogation In Fire Insurance

Imagine a fire devastates your property. Thankfully, you have fire insurance. The insurance company
compensates you for the losses, but the story does not end there. The concept of subrogation in fire and
burglary insurance kicks in.

The doctrine of subrogation allows your insurance company to step into your shoes and pursue the party
responsible for the fire, aiming to recover the money they paid you.

Subrogation: This is the most important option. The insurance company pays for the fire damage and has
the right to sue the responsible third party to recover its money.

So, basically, when there is a fire, and the insured has losses covered by their fire insurance, the insurance
company pays for the damages, repairs, or replacements. But if the fire was someone else's fault, like a
contractor or manufacturer, the insurance company can ask them to pay back the money it spent.

Prevents Double Recovery: Subrogation prevents the insured from getting paid twice for the same loss. If
they could claim from both the insurance company and the responsible party, it could lead to profiting
from the loss, which goes against the idea of insurance as a safety net.

Double Insurance

Double insurance occurs when an individual procures two insurance policies for the same property from
one or more insurance providers. There are two types of double insurance: Unintentional and intentional
double insurance. Either of these can cause disputes among the insurance providers and delay the claims
process unexpectedly. The Indian insurance laws neither prohibit nor discourage double insurance.

Double insurance refers to a situation when a customer obtains two insurance policies for the same
property, either with or without previous knowledge. These insurance policies are obtained from one or
more insurers for the same risk and subject matter. Double insurance is not a major issue; however, it can
cause insurance providers to argue about whether they have any payout at all, leading to an unexpected
delay in claim processing.

There is no provision in the Indian Insurance Act of 1938 about double insurance, Section 34 of the
Indian Marine Insurance Act of 1963 outlines the statutory definition of Double Insurance. Accordingly,
anyone is free to purchase as many insurance coverages on the same subject as he desires.

bony varghese | Al Azhar Law College | 3 year LLB 4

 Principle of Contribution in Double Insurance

In the context of double insurance, the Principle of Contribution determines how the payment
responsibilities are to be allocated among the insurance providers. This principle ensures equitable
distribution of losses among the multiple insurance providers involved.

It prevents policyholders from receiving compensation exceeding the actual loss in cases of double
insurance claims. Essentially, the Principle of Contribution aids in determining the proportionate liability
of each insurance provider obligated to cover the loss incurred.

Contribution = (Sum insured with one insurance provider/Total sum insured) x Actual Loss

Eg: Nitin has obtained health insurance from two different providers, say X and Y. The following are the
coverage amounts:

Rs. 6 Lakh from X

Rs. 4 Lakh from Y

Assume Nitin is admitted and his total claim is Rs 2 lakhs. He uses the policy from X and receives Rs 2
lakhs. Then he goes back to provider Y and asserts his claim once again. Now, he is no longer eligible
because he has already obtained the claim.

However, provider X has the right to claim Rs 80 thousand from provider Y, as per the principle of
contribution in double insurance.

However, according to the principle of contribution in double insurance, insurance provider A is entitled
to claim a portion of the loss from insurance provider B. Insurance A can claim ₹80,000 from insurance
provider B when calculated using the contribution formula.

The conditions involved in the principle of contribution

 There must be double insurance

 The subject must be related to General Insurance Policies.
 All insurance must cover the same risk or subject matter.
 All policies must remain active when the amount is claimed.
 The insurance provider must possess an Insurable Interest in the subject matter and incur some actual
loss.
 The policy in question must cover the incident that resulted in the loss.
 The overall loss must be shared proportionally.
 If one insurer has fully reimbursed the claimant, he is entitled to his proportionate share from the
remaining insurance companies.

bony varghese | Al Azhar Law College | 3 year LLB 5

Clauses related to double insurance

To minimize liability in the event of double insurance, the insurance providers typically employ the
following clauses. They can use any of the following, or a combination of them:

Excess clause

According to this clause, the liability of one insurer arises only when the loss exceeds the limit of the
other insurance. In other words, the excess insurer will only pay the amount that exceeds the limits of
the primary insurer's coverage. The purpose of the excess clause is to provide a higher level of
coverage for the insured without duplicating the coverage provided by the primary insurer and to
prevent the insured from collecting more than the full amount of their loss.

Notification clause

According to this clause, the insured is obliged to provide an intimation to the insurance provider if
he has the same risk insured with another insurance provider. If the insured fails to provide such
information, the previous insurance company's liability will be avoided. It is important to emphasize
that the insured must provide a written notice only; oral communication will not suffice.

The purpose of this clause is to ensure that the secondary insurer is aware of the primary insurance
coverage and can properly apply the liability exemption clause or escape clause in the event of a loss.
Failure to comply with the notification clause can result in the secondary insurer denying coverage or
reducing the amount of the settlement.

Rateable proportion clause

According to this clause, an insurance provider will only cover a part of the loss, if another policy
responds to the same risk. The clause requires the insurers to share the loss in proportion to the
amount they would have been liable for if there had been only one policy. The clause aims to prevent
the insured from collecting more than the full amount of their loss, even though they have multiple
policies covering the same loss. This clause is intended to encourage cooperation and sharing of
information between insurers and to prevent over-insurance and double recovery by the insured.

In general, most insurance companies include an 'Other Insurances' clause in their policies to reduce
liability in the event of double insurance. As a general rule, all policyholders are entitled to claim
their losses from whichever insurance company they want. But insurers utilize such clauses to limit
the implementation of the notion of Double Insurance and the principle of contribution. In India,
insurance companies typically have a set of standard policy wordings, approved by the Insurance
Regulatory and Development Authority of India (IRDAI). The IRDAI also has guidelines in place to
regulate and monitor the use of excess clauses in insurance policies in India. This is to ensure that
policyholders are protected and that the insurance industry operates in a fair and transparent manner.

bony varghese | Al Azhar Law College | 3 year LLB 6

Average In Fire Insurance

The average clause in insurance is a provision that applies when your property is undervalued or
underinsured at the time of policy purchase.

Under the average clause, the insurer applies a reduction factor to your claim amount based on the degree
of underinsurance.

The concept applies to most fire insurance policies unless otherwise specified. It is also known as the pro
rata condition of average or the underinsurance clause.

Why is the Average Clause in Fire Insurance Policy Important?

 It discourages underinsurance and encourages adequate coverage.

 The average clause ensures that the insurance company does not pay more than the proportionate
value of the property in case of a partial loss.
 It prevents the insured from profiting from the insurance claim
 The average clause also ensures that the insured pays a fair premium for the coverage they
receive.
 If the property is underinsured, the insured pays a lower premium than they should, which is
unfair to the insurance company and other policyholders. The average clause corrects this
imbalance by reducing the claim amount in proportion to the degree of underinsurance.

Mr. A has insured his house property values at Rs. 5.00 Lakhs and he has taken an insurance policy of
sum assured Rs. 4.00 Lakhs and the damage done to his house due to fire is Rs. 1.00 Lakhs. Now in this
case the insurance company will pay him Rs. 0.80 Lakh as insurance claim and he has to bear Rs. 0.20
Lakh as his own.

Property Insurance

Property insurance is a broad term for a series of policies that provide either property protection
or liability coverage for property owners. Property insurance provides financial reimbursement to the
owner or renter of a structure and its contents in case of damage or theft—and to a person other than the
owner or renter if that person is injured on the property. Eg. damage caused by fire, smoke, wind etc.

If there's a claim, the property insurance policy will reimburse the policyholder for the actual value of
the damage or the replacement cost to fix the problem.

Property insurance policies normally exclude damage that results from a variety of events, including
tsunamis, floods, drain and sewer backups, seeping groundwater, standing water, and a number of other
sources of water. Mold is typically not covered, nor is the damage from an earthquake. In addition, most
policies will not cover extreme circumstances, such as nuclear events, acts of war, or terrorism.

There are three types of property insurance coverage: replacement cost, actual cash value, and extended
replacement costs.

bony varghese | Al Azhar Law College | 3 year LLB 7

  Replacement cost covers the cost of repairing or replacing property at the same or equal value.
The coverage is based on replacement cost values rather than the cash value of items.
 Actual cash value coverage pays the owner or renter the replacement cost minus depreciation.
If the destroyed item is 10 years old, you get the value of a 10-year-old item, not a new one.
 Extended replacement costs will pay more than the coverage limit if the costs for construction
have gone up; however, this usually won't exceed 25% of the limit. When you buy this
insurance, the limit is the maximum amount of benefit the insurance company will pay for a
given situation or occurrence.

Liability Insurance – Third Party Insurance

Liability insurance is an insurance product that provides protection against claims resulting from injuries
and damage to other people or property. Liability insurance policies cover any legal costs and payouts an
insured party is responsible for if they are found legally liable. Intentional damage and contractual
liabilities are generally not covered in liability insurance policies.

Unlike other types of insurance, liability insurance policies pay third parties, and not policyholders.

Liability insurance is also called third-party insurance.

Liability insurance does not cover intentional or criminal acts even if the insured party is found legally
responsible. Policies protect both the insured and third parties who may be injured as a result of the
policyholder's unintentional negligence.

For instance, most states require that vehicle owners have liability insurance under their automotive
insurance policies to cover injury to other people and property in the event of accidents. A product
manufacturer may purchase product liability insurance to cover them if a product is faulty and causes
damage to the purchasers or another third party. Business owners may purchase liability insurance that
covers them if an employee is injured during business operations. The decisions doctors and surgeons
make while on the job also require liability insurance policies.

Risk Insurance - also known as insurance coverage or risk transfer

Risk insurance refers to the risk or chance of occurrence of something harmful or unexpected that might
include loss or damage of the valuable assets of the person or injury or death of the person where the
insurers assess these risks and, based on which, work out the premium that the policyholder needs to pay.

Most of the risks are nowadays insurable by insurance companies. These companies calculate the
probability of the events and their impact and then calculate the premium accordingly. It protects the
individuals and entities from heavy financial losses by transferring the burden of loss to the insurance
company in exchange of the premium.

Types

Pure Risk, Speculative Risk, Financial Risk etc

Let us assume a bakery that has a huge outlet in a prominent and busy part of a city. The manufacturing
and sale takes place in the same outlet. In this case, the risk insurance will be quite high, considering the
operation system. The outlet will have a lot of electric gadgets and ovens which are itself quite risky.

bony varghese | Al Azhar Law College | 3 year LLB 8

Moreover, in the same outlet, customers will visit for purchase, adding to the risk. It is also located in a
busy part of the city, which means that a minor accident may result in significant damage due to a lack of
space. Therefore, this bakery will have to take a special risk insurance to insure its outlet to mitigate the
loss risk in exchange for a high premium.

Contractors' Risks (CAR) Insurance

Contractors' all risks (CAR) insurance is a non-standard insurance policy that provides coverage
for property damage and third-party injury or damage claims, the two primary types of risks on
construction projects.

Damage to property can include improper construction of structures, the damage that happens during a
renovation, and damage to temporary work erected on-site.

CAR insurance coverage is common for construction projects involving buildings, water tanks, sewage
treatment plans, flyovers, and airports.

Typically, both contractor and employer jointly take out CAR insurance policies. Other parties such as
financing companies have the option of being named to the policy. Because multiple parties are included
in the policy, each retains the right to file a claim against the insurer. All parties have the duty to inform
the insurer of any injuries and damages that may result in a claim.

The goal of a CAR insurance policy is to ensure that all parties on a project are covered, regardless of
the type of damage to the property or who caused the damage.

Insurers who underwrite this type of policy lose the right to subrogation. That means that if an insurance
company pays out funds to one party in the contract, it cannot seek to recover those funds from another
party in the contract.

For example, if the owner of a large building and the contractor working on the building are on the same
CAR policy, any damages to the building caused by the contractor can be recovered by the building
owner when a claim is filed. The insurer, however, cannot seek to recover funds from the contractor.

CAR coverage may be extended to cover the interests of manufacturers, suppliers, contractors, and
subcontractors.

Eg.: Fire, lightning, explosion/implosion, aircraft damage, flood, storm, landslide, theft, burglary,
RSMD, Negligence, lack of skill, collision, impact, dropping,etc.

By paying additional premium policy can be extended to cover additional perils/expenses which are
mentioned below:

Earthquake, Terrorism, Air freight

War and nuclear perils, Damage due to faulty design, defective materials, bad workmanship, etc are
exclusions

bony varghese | Al Azhar Law College | 3 year LLB 9

Employers' Liability Insurance

Employers' liability insurance is an insurance policy that handles claims from workers who have
suffered a job-related injury or illness not covered by workers' compensation. A type of liability
insurance, it can be packaged with workers' compensation to further protect companies against the costs
associated with workplace injuries, illnesses, and deaths.

However, employers' liability insurance does not cover legal costs from employee lawsuits charging
discrimination, sexual harassment, or wrongful termination. To cover these situations, an employer
would need to purchase a separate type of policy called employment practices liability insurance (EPLI).

If an employee feels that workers' compensation does not adequately cover their loss—perhaps because
they feel their employer’s negligence caused their injury—they may decide to sue their employer
for punitive damages arising from their situation, for things such as pain and suffering.

This is where employers' liability insurance comes in. Designed to deal with expenses that fall outside
the realm of the workers' compensation statutes or general liability insurance, it provides additional
protection against financial loss for the company or business.

Third-party lawsuits: An employee may be injured by a piece of equipment on the job, for example,
and sue the equipment manufacturer—who then files suit against the employer.

Loss of consortium lawsuits: Filed by family members of a deceased or disabled employee, seeking
compensation for the loss of the relative or their income.

Consequential bodily injury lawsuits: Filed by a non-employee who suffers physical damage as a
result of an employee's injury, such as a spouse who develops health problems from taking care of the
injured worker.

Dual-capacity lawsuits: When an employee sues their employer both as an employer and as something
else. Eg.: A piece of a ceiling in the workplace falls and hits a worker, and they file suit against their
company in its dual capacity as employer and as the premises owner.

Employers' liability insurance coverage does not cover every situation. Exclusions include criminal acts,
fraud, illegal profit or advantage, purposeful violation of the law, and claims arising out of downsizing,
layoffs, workforce restructurings, plant closures, strikes, mergers, or acquisitions.

Goods in Transit Insurance

When goods and commodities are transported from one location to another, there are risks of damage
during transportation, loading and unloading. There are financial losses associated and even the risk to
lose customers and brand goodwill.

GIT insurance is a commercial line policy, and it is taken up by business organizations, especially those
in the haulage business.

bony varghese | Al Azhar Law College | 3 year LLB 10

This policy covers “Transit Risk” only. What this means is that cover commences only when the
conveying vehicle or ship leaves point A, and ceases immediately it gets to its destination. Whatever loss
or damage there may be before or after the transit is not recoverable under the ambit of the policy.

GIT relates to movement of goods:

(A) By land; be it road or rail that is within a territorial limit

(B) By water; this is also limited to inland water ways only that is within a geographical location for
example India. Movement of goods by water between countries is covered under the marine cargo
insurance policy.

GIT Insurance Policy comes in 2 types of covers;

(A) Restricted Cover - This covers only loss of or damage consequent upon accidental collision or
overturning of the conveying vehicle. Under this arrangement, loss or damage to goods which is not as a
result of an accidental damage (collision or overturning) to the conveying vehicle is not covered.
(B) All Risk Cover - This type of arrangement provides indemnity against loss of or damage to goods by
fire, accident, theft or pilfering while the goods are being loaded on, carried by or unloaded from the
conveying vehicle and while temporarily garaged during transit.

GIT Insurance Policies can be arranged in two methods;

Single Transit; this is a one-off arrangement. The proposer gives the description and value of goods to be
carried as well as details/particulars of the conveying vehicle. The period of the transit is also stated. As
soon as the goods reach the specified destination, cover terminates irrespective of the expiry date of the
state period.

Open Cover (Annual Basis); Under this arrangement, the proposer gives full description of goods
stating the Estimated Annual Carrying (E.A.C) as well as the Limit Any One Carrying (L.A.O.C). The
L.A.O.C is the monetary value of goods the insured intends to carry per transit. The L.A.O.C represents
the maximum liability of the underwriters in the event of a loss. The E.A.C is gotten by multiplying the
L.A.O.C by the number of times the transit is expected to be made per annume .

Public Liability Insurance

Public liability insurance is a type of business insurance that is essentially an older form of general
liability insurance. Public liability insurance helps pay liability claims against your small business made
by the general public, such as customers, delivery personnel or visitors.

Public liability insurance helps protect your business from claims of accidents, bodily injuries or property
damage that can come up when working with the general public or third parties at your business property.
This type of insurance is one of the most basic forms of liability coverage and is typically one of the
cheapest.

In India we have Public Liability Insurance Act 1991

bony varghese | Al Azhar Law College | 3 year LLB 11