Various Types of Fire Insurance

The insurer issues a duly stamped policy which will bear all the terms and conditions of the contract. Any contract of fire insurance comes within the meaning of the word ‘policy’. It is a statutory and formal document of insurance contract. There are different forms of policies for different types of policies. For meeting various needs of the businesses and individuals there are various types of fire policies which are issued.

The policies can be of various types which are discussed in the following paragraphs.

Valued Policy

The value of the property to be insured is determined at the inception of the policy. !n this case, the insurer pays the total admitted value irrespective of the then market value of the properties. The measure of indemnity is, in consequence, not value at the time of fire, but a value agreed at the inception of the policy. The insurer pays the insured a fixed sum following the destruction of the insured property. The amount fixed may be greater or less than the actual market value of the property destroyed by fire at the time of loss. In this policy, the measure of indemnity is based on the value of properties rather than on the market values of the property destroyed. This policy is used for insuring specially pictures, sculptures, works of art, jewellery, rare things, articles of everyday use. Since the value of damage of these articles cannot be easily determined at the time of loss, the valued policies are commonly used. Strictly speaking the valued policies are betrayal from the principle of indemnity because the market price is not paid in this case.

The valued policy is beneficial to the insured because he is relieved of proving the value of property at the time of loss by searching of invoices and receipts. The disadvantages are that the new purchases and replacement cannot be added to the valued policy. The valuation, therefore, is revised at frequent intervals. The insurer will have to pay more than the actual loss if the market price of the property has gone down. It may increase the moral hazard. There may be difficulty in settling the partial losses. The valued policies can be disputed on grounds of fraud.

Valuable Policy

Valuable policy is that policy where claim amount is to be determined at the market price of the damaged property. The amount of loss is not determined at the time of commencement of risk but is determined at the time and place of loss. This policy is truly representing the doctrine of indemnity.

Specific Policy

Where a specific sum is insured upon a specified property in case of a specified period, the whole of the actual loss is payable provided it does not exceed the insured amount. Here the value of property insured has no relevance in arriving at the measure of indemnity in a specified policy and the insured sum sets a limit up to which the loss can be made good.

Floating Policy

The floating policy is the policy taken to cover one or more kinds of goods at one time under one sum assured for one premium and in relation to the same owner. This policy is useful to cover fluctuating stocks in different localities. Since the properties are spread over various localities and in different forms, the physical and moral hazards are also varying and, therefore, it makes difficult to determine premium rates. In India, the premium rate is approximately the same in such case except ter case of most hazardous risk. Such policies are specially taken by big manufacturers or traders whose merchandise might be lying in parts at warehouse, port, or railway station. In such cases, it is very difficult for the owner of such goods to take specified policy for each good because the quantities of the goods deposited in each will fluctuate from day to day, place to place, according to sales or consumption or consequent removal and replacement. The average rate of premium is ascertained by taking into account the total premium payable had the property been insured by specific policies. The floating policy contains the ‘average’ and ‘marine’ clauses. The policy is taken only on stocks. The policy cannot be issued in respect of immovable property. The address of each godown has to be declared by the insured. Unspecified locations cannot be covered. The entire complex is under the control of insured. There is extra premium for the addition risks.

Average Policy

Policy containing ‘average clause’ is called an Average Policy. The amount of indemnity is determined with reference to the value of the property insured. If the policy holder has taken policy for lesser amount than the actual value of the property, the insured will be deemed to be his own insurer for the amount of under-insurance. The insurer will pay only such proportion of the actual loss as his insurance amount bears to the actual value of the property at the time of loss. For example, the property worth $30,000 is insured for $20,000 is damaged up to $12,000, the insurer will pay only Rs. 8,000 as is evident from the following:

Claim = Insured amount / value of property X actual loss

The insured, thus, will suffer him up to $4,000 and the insurer will pay only $8,000 out of Rs. 12,000. In this case, if the insurance was taken up to the full value of the property, the assured would have been paid all the financial loss, i.e., $12,000. Since the insurance was taken for lesser than the actual value of property, the assured is compensated the loss in that proportion.

The average clause is operative only in case of under-insurance. This clause is ineffective when the property is insured for the full value as in that case the insured is protected to the extent of his total loss. The under-insurance penalizes the assured by inserting ‘average clause’ to the policy because he is supposed to insure himself for the amount by which he under-insures his property and, therefore, is supposed to contribute in that ratio to the loss sustained. The average clause is accompanied, sometimes, with the co-insurance clause which is discussed in the next chapter.

Excess Policy

Sometimes, the stock of a businessman may fluctuate from time to time and he may be unable to take one policy or specific policy. If he takes policy for a higher amount, he has to pay a higher premium. On the other hand, if he takes insurance for lower amount, he will have to bear the proportionate amount of loss. The insured in this case can purchase two policies, one ‘First Loss Policy” and second, ‘excess policy.’ The ‘First Loss Policy’ will cover that stock below which the stock never goes. The minimum level of stock can be found out from the past experience and for the other portion of stock which exceeds the minimum limit; he can purchase another policy called ‘excess policy’. The actual value of the excess stock is declared every month. The amount of premium is calculated on the average monthly excess amount. Since the chances of payment on the excess amount are very remote, the rate of premium is also very nominal. Thus, the insured will pay very nominal premium as compared to the premium payable on the total amount had the policy been specific one. The average .clause also applies to this policy.

Declaration Policy

The excess policy contributes to only a ratable proportion of the loss because if the amount of excess stock exceeds the sum set in the excess policy the businessman will not have a full cover owing to average condition. Moreover, if the First Loss Policy was also subject to average condition the assured will be at a loss. The declaration policy will give a better protection in such cases where the stock fluctuates from time to time. Under the declaration policy, the insured takes out insurance for the maximum amount that he considers would be at risk during the period of the policy. On a fixed date of every month or a specific period, the insured furnishes a declaration of the amount. The premium is provisionally paid to 75% of the annual premium amount. Practically, the annual premium is determined on the average of these declarations, If the premium is higher than the provisional premium already paid, the insured has to pay .the difference to the insurer. On the other hand if the premium so calculated is lesser than the premium already paid, the excess is returned to the policyholder. The declaration must be made on a specified day or within the next 14 days, otherwise the sum insured will be deemed to be the declaration value. The policy is applicable only to stocks and the sole property of the insured.

The great advantage of this policy is that the premium is limited to the actual amount at risk irrespective of the sum insured. Unlike the excess policy, the premium is not unnecessarily paid. Moreover, the insurer may pay up to the fill! sum insured throughout the period of the policy because the premium amount can be adjusted accordingly. The value of risks is average of the each day of the month or the highest value at risk during the month. Declaration policy is not available for a short period stock in process, stock at Railway siding. Premium is adjusted at the expiry of policy. The policy is very advantageous to those business men whose stocks fluctuate from time to time. The amount of the declaration offers scope for fraud because the insured may pay lesser premium by undervaluing the stock. Therefore, this policy is issued only to reputed concerns.

Adjustable Policy

The above disadvantage is removed by adjustable policy. This policy is nothing but an ordinary policy on the stock of the businessman with liberty to the insured to vary at his opinion, the premium is adjustable pro-rata according to the variation of the stock. In case of declaration policy, since the excess premium is refundable at the end of the year, the insured may put fire to the property. This danger is avoidable in an ‘Adjustable Policy’. This is issued for a definite term on the existing stock. The premium is calculated in the ordinary manner and is paid in full at the inception of the policy. Whenever, there is variation in the stock, the insured informs the insurer. As soon as the information of variation is received, the policy is suitably endorsed and ,the premium is adjusted on a pro-rata basis. The policy amount will, thus, be changeable from time to time. The premium is also settled accordingly.

Difference between Declaration and Adjustable Policies

In ease of declaration policy, the insurer’s liability is the insured amount but in the Case of adjustable policy, the insurer’s liability is the value of the last declaration made. The periodical declarations have no direct bearing on the measurement of indemnity in case of declaration policy, but these have been the basis of measurement of indemnity. The advantage of the declaration policy over the adjustable policy is that in the former a margin of safety is present because the maximum amount insured is always at the risk, but in the latter case the cover is always for the declared value. The declaration is, the case of declaration policy is meant only for the purpose of ascertaining the average of the actual cover given throughout the year to arrive at the figure to which the actual premium will be calculated, but in case of adjustable policy the declaration is the basis of policy amount adjusted by endorsement. The drawback of this policy is that the insured will have to deposit 75 per cent of the premium fixed for the maximum cover in the beginning although a portion of it if found in excess of the actual premium required for the full coverage will be returned at the end of the year. In case of adjustable policy, the premium is adjusted from time to time according to the variation of the risk and the liability of the insurer.

Maximum Value with Discount Policy

Under this policy no declaration or adjustment of policy is required, but the policy is taken for a maximum amount and full premium is paid thereon. A: the end of the year, in case of no loss, one-third of the premium paid is returned to the policy holder. This policy is similar to the declaration policy where botheration of checking and recording declarations is avoided. It serves as a rough and ready method of coverage for-maximum amount. This policy is not issued on all types of commodities and is confined only to selected commodities.

Reinstatement Policy

This policy is issued to avoid the conflict of indemnity, in other types of policies only the market value of the damage or loss is indemnified but, this policy under takes to reinstate the insured property lost by fire to new condition irrespective of its value at the time of loss.

In other types of policies, in case of building or machinery, the actual loss is arrived at by deducting the regular depreciation from the original cost of it. The amount of indemnity will be lesser than the amount to be spent in reinstating the property destroyed or damaged. In order to provide full coverage ‘reinstatement or replacement’ policies are issued. Under this policy, the basis of settlement in the event of destruction is the cost of rebuilding the premises or in case of plant and machinery, the placement is done by similar machinery. The reinstatement of the damaged property indicates the meaning of repair of the damages. The restoration of the damaged portion of the property to a condition substantially the same is but not better or more extensive than its condition, at the time of its renovation. The cost of the property when partially destroyed will not be more than the cost which would have been insured if such a property has been totally destroyed.

The payment of the actual expenditure on replacement will not be made until the expenditure has actually been incurred. This policy is also called ‘New for Old’ policy because the old property is replaced by new properties. However, such policies are issued only on building, plant and machinery. This policy is not issued on stock, merchandise or materials. Each item of the insured property is subject to average. The policy provides the definite amount in case of purchase of new property in place of the old property destroyed. The reinstatement Policy stipulates that reinstatement must be carried out by the insured in order to obtains the special basis of settlement agreed. The reinstatement must be commenced arid carried out with reasonable dispatch and in any case must be complete within 12 months after the destruction or damage or until reinstatement carried out and expenditure incurred, the liability under the policy remain on the normal indemnity basis. The insurance by this policy intends to include such additional cost of reinstatement as may be incurred solely by reason of the necessity to comply with the building, etc. by any Act of Parliament, Municipal or Local Authority. No additional premium is charged for the purpose. This policy does not cover any destruct ion or damage occurring prior to the granting of this extension.

Comprehensive Policy

This policy undertakes full protection not only against the risk of fire but combining within the risk against burglary, riot, civil commotion, theft, damage from pest, lightning. The policy is also termed as ‘All in policies’. Here the ‘Comprehensive’ does not mean that every type of risk is covered. There may be many exclusions and limitations. This policy is beneficial to the insured and the insurer. The insurer can get higher premium and the assured is protected against losses due to several specified perils.

Consequential Loss Policy

The fire insurance is originally purchased to indemnify the material loss only. The intangible interest was not indemnified. This provided a check on the insured to exercise a greater care with respect to the property. However, the settlement of a loss covering material damage only was not sufficient. The consequential loss was also to be provided. Thus, the consequential loss policy includes the loss of tangible and intangible properties.

Thus, this policy provides an indemnity to the insured for loss of net profits, payment of standing charges and expenditure in respect of increased cost of working. As a consequence of fire, there is a reduction in the volume of business which in its turn leads to a reduction in the net profit which the lost business would have ordinarily contributed and to an increase in the proportion of the standing i barges such as rents, rates, salaries and others to the total business done. Thus, the policy is to indemnify the insured against financial loss which he may sustain due to the interruption of his business following a fire. Previously the measure of indemnity was a specified percentage of the amount payable under an ordinary fire policy in respect of a material loss, The insurer, thus, used to pay the amount of loss and a specified percentage of the loss. However, now, the measure of indemnity is changed because the specified percentage cannot be the true estimation of the intangible loss. So, the resultant loss is calculated by estimating figures ofloss of profits based on a reduction in turnover or output and secondly, increased cost of working in maintaining the business on its pre-fire level.

Sprinkler Leakage Policies

This policy insures destruction of or damage to by water accidentally discharged or leaking from automatic sprinkler installation in the insured premises. However, the discharge or leakage of water due to heat caused by fire, repair or alteration of building nr sprinkler installation, earthquake, war, explosion are not covered by this policy.

Add on Covers Policy

An insured may like to cover his property against to delete some of the exclusions. The cover in respect of these perils is provided by insurer by charging additional premium. This additional cover is effected by either deletion of some of the excluded perils or addition of other specified perils. The perils which are covered by sn endorsement of the basic fire policy are collectively called, Add on Covers. For example, earthquake damage are added to the fire policy.

There are certain principles to add on covers. It is extension of the basic standard fire policy. The liability shall in no case under the extension of the policy exceed the sum insured of the policy. All the conditions of the basic fire policy shall apply to the insurance granted by extension. Add on cover is mid-term inclusion but the annual premium has to be charged and not short period premium. If the insured requests for the add on cover to be cancelled midterm the no refund of premiums for the cancellation will be allowed unless the entire policy is cancelled.

Escalation Policy

This insurance allows automatic regular increase in the sum insured throughout the period of the policy in return for an additional premium to be paid in advance. There are certain conditions for escalation insurance. The escalation of policy amount shall not be more than 25 per cent of sum assumed. The additional premium payable in advance, will be at 50% of the full rate. This policy applies to policies covering building, Machinery and accessories only and will not apply to policies covering stock. The clause cannot be opted for during the currency of the policy but only at inception or renewal The effect of this policy/clause is to provide for a daily increase in the sum assumed based on the percentage selected spread over the period of the policy; It also allows automatic regular increase up to 25% of the sum insured of throughout period of the policy in return of an additional premium to be paid in advance.

Specialized Policies

Special policies for different risk exposed products are also issued specifically with their respective premium term and warranties. The important specialized policies are petrochemical policy, industrial ail risks policy, machinery breakdown policy, material damage policy, business interruption policy, engineering good policy, electrical installation policy, housekeeping policy, mega risk policy and consequential loss policy.

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