1. FIRE INSURANCE
1. INTRODUCTION TO INSURANCE
1.1 Meaning of Insurance
As stated in the very beginning, insurance companies bear risk
in return for a fee called premium. Thus, insurance companies are risk
bearers. They accept or underwrite the risk in return for an insurance
premium. Accordingly, the term insurance may be defined as a co-
operative mechanism to spread the loss caused by a particular risk
over a number of persons who are exposed to it and who agree to
ensure themselves against that risk. Risk is, in fact, an uncertainty of a
financial loss. Risk must not be confused with loss itself that is the
unintentional decline in or disappearance of value arising from a
contingency. The function of insurance include providing certainty,
protection, risk sharing, prevention of loss and capital formation.
Wherever there is uncertainty with respect to a probable loss there is
risk. The insurance is also defined as a social apparatus to accumulate
funds to meet the uncertain losses arising through a certain hazard to a
person insured for such hazard.
Insurance has been defined to be that in which a sum of money
as a premium is paid by the insured in consideration of the insurers
bearing the risk of paying a large sum upon a given contingency. The
insurance, thus, is a contract whereby: -
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• Certain sum, termed as premium, is charged in consideration
• Against the said consideration, a large amount is guaranteed
to be paid by the insurer who received the premium.
• The compensation will be made in a certain definite sum, i.e.,
the loss or the policy amount whichever may be, and the
payment is made only a contingency.
1.2 Introduction To Insurance
Insurance is a tool by which fatalities of a small number are
compensated out of funds (premium payment) collected from
plenteous. Insurance companies pay back for financial losses arising
out of occurrence of insured events, e.g. in personal accident policy
death due to accident, in fire policy the insured events are fire and
other allied perils like riot and strike, explosion, etc. Hence, insurance
is safeguard against uncertainties. It provides financial recompense for
losses suffered due to incident of unanticipated events, insured within
policy of insurance. Moreover, through a number of Acts of
parliaments, specific types of insurance are legally enforced in our
country, e.g. third party insurance under Motor vehicles Act, public
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liability insurance for handlers of hazardous substances under
Environment Protection Act, etc.
Insurance, essentially, is an arrangement where the losses
experienced by a few are extended over several who are exposed to
similar risks. Insurance is a protection against financial loss arising on
the happening of an unexpected event. Insurance companies collect
premium to provide security for the purpose. As loss is paid out of the
premium collected from the insuring public and the insurance
companies act as trustees to the amount so collected. Insurance
companies have standard proposal forms, which are to be filed up
giving the details of insurance company. Depending upon the answers
given in proposal form insurance companies assess the risk and quote
the premium. On payment of premium and acceptance thereof by
insurance company the insurance is affected. Nonetheless, there is no
insurance cover if premium is not paid.
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2. INTRODUCTION TO FIRE INSURANCE
Fire insurance is a contract
to indemnity, to the insured for
destruction of or damage to property
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 policy. 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.
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Section 2(6) of the Fire Insurance Act, defines, “Fire
insurance business means the business of affecting, otherwise than in
evidently, to some other class of business, contacts of insurance
against loss by or incidental to fire or other assurance customarily
included among the risks insured against in fire insurance policies.”
2.3 Characteristics or Nature of Fire Insurance
It is a means of security against risk of fire on any material or
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 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 option
to the parties to renew it for a further period on payment of stipulated
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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 any claim if the fire is caused
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 forthwith to safeguard his
interests, in dealing with salvage and also judge the cause and nature
of fire, and the extent of the loss.
It is the duty of the insured to act as a man of ordinary produce to take
necessary steps to save the property from loss of fire, as in the absence
of any insurance against the property.
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2.4 Meaning of Fire
The word fire means “loss by fire” and in literal sense means a
fire has broken bounds. Therefore fire, which is used for ordinary
domestic purposes or even for manufacturing, is not fire. ‘Fire’ in fire
insurance must have the following two features:
Production of ignition, light and heat.
Fire by accident.
2.5 Definition of Fire
According to Justice Boyles (in Everett vs. London
Association Company 1885) “Fire means the production of light and
heat by combustion and unless there is actual ignition there is no fire
within the mean sing of term in ordinary policy.”
2.6 The various loss caused by fire
The losses by the following instances or losses subsidiary
to fire are as follows:
Damage, which occurs as a result of smoke or of putting out
the fire, would be covered by the fire risks.
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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 the 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
Every loss directly, or if not directly at least consequently
resulting from the fire is within the policy (In Stanley vs.
Western ins. Co., 1968).
Loss by theft during a fire is covered as a fire risk (In Levy vs.
Even loss by fire caused by the insured’s negligence is covered
by the policy (In Harris vs. Poland, 1941).
3. NATURE AND USE OF FIRE INSURANCE
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3.1 Definitions and Nature
Fire insurance is a device to compensate for the loss consequent upon
destruction by fire. Thus the fire insurer shifts the burden of fire losses from
their actual victims over to all the members of the society. It is a cooperative
device to share the loss. It relieves the insured from the horror of the fire
losses to which he is exposed.
It is a well-known fact that the fire causes huge losses every year. The
individual owner by taking fire insurance can prevent the fire waste to some
extent. The insurer acts as a middleman between all the members of the
society who are exposed to the fire risk on the one hand and the members
who will be the actual victims of the fire losses on the other. The insurer
changes the premium from all the insured members and makes good the
losses when they occur to any of them.
The system of fire insurance cannot save the society from the economic loss
to the community to the extent of the property lost by fire, but it
compensates someone and this saves him from a ruinous loss, at the cost of
group of some others.
3.3 Causes of Fire
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Fire waste is the result of two types of hazard viz., ‘physical’
a. Physical Hazard
It refers to the inherent risk of fire in the property, which
may occur due to inflammable nature, construction, artificial
lighting and heating, lack of extinguishing apparatus use of the
b. Moral Hazard
The moral hazard depends upon the man as physical
hazard depends on the property. The property may be set on fire
by the owner or by any person with his willingness,
carelessness and lack of sense of duty may also increase the fire
waste. Sometimes, when market price is going down the owner
can willingly set fire on the property and gain from the payment
of insurance money. Thus, where the property was destroyed
with the willingness of the property owner, moral hazard exists.
c. Prevention of Loss:
Insurance is meant for indemnification of loss and not
for prevention of loss although every reasonable step can be
taken to eliminate it or minimize it through the agencies
engaged in prevention of loss. Thus, insurance may help in two
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I. Indemnification and
II. Preventive Efforts.
I. Indemnification or Curative Efforts: - According to
doctrine of indemnification, the financial loss suffered by
the perils insured against will compensated in full, not
more than this and not less than this. The insurance
provides protection by indemnifying the financial loss
suffered by insured person, which occurred beyond the
control of insured and insurer.
II. Preventive Efforts: - The loss cannot be prevented by
insurance. But, the insurers help those who are engaged
in the preventive efforts by granting financial and other
assistances. This will benefit insurers as well because if
the loss of society is reduced, they can charge lesser
premium, which will stimulate the public of insurance.
Fire insurers stimulate the installation of protective
devices and better types of construction through granting
credit. They help in installation of fire-fighting apparatus,
water supply and engineering services.
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Preventive efforts are divided into two parts:
Private activities and
Private Activities are those which include those activities which
the property owner may engage in for the purpose of preventing fire
loss. Insurers give sincere advice of financial help to property owner
on the following factors.
In construction of building, fire resistive materials,
fireproof construction, greatest care in exercising selection of the
type and planning of the construction, availability of fire
extinguisher, water supply, etc.
The important thing is to extinguish fire before it reaches
large proportions. The owner should consider equipping his
building with an automatic sprinkler system. Similar fire fighting
equipment may be established. Insurers with the help of fighting
associations can provide such services.
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There are considerable hazard in certain occupation e.g.
in oil or coke or chemical industry. Insurance in these concerns is
available at higher rate. Insurance help by stimulation and charging
lesser premium in fire fencing occupation.
Good management of property may reduce the chances
of fire. Carelessness and indifference cannot be over emphasized
because these increase the chance of fire.
Fire insurance rates are determined on the basis of
possibility of exposure. Fireproof services may reduce the chances
of exposure to a greater extent.
Public Fire Prevention Activities:
Fire insurers have performed numerous important
services to reduce the fire waste with the help of public
institutions, which are engaged in fire fighting activities.
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Engineering survey of the cities and localities is made.
As a result of its investigation many have improved their fire
departments, water supplies and other facilities involved in the
protection against fire.
Standard Schedule For Grading Cities
Under this schedule a number of cities, town, or Mohall
as are divided, according to fire preventive devices. The
deficiencies in each party sorted out and attempts are made to
The laboratories are to find out the possible causes of fire
losses. Every time research or investigation is made to find out the
possible attempts to prevent fire losses.
Fire can be properly checked only through the possession
and maintenance of adequate equipment, personnel fire alarm
system and water supply. The Fire Protection Association can
determine fire fighting apparatus and equipment for any city or
Salvage Corps and Salvage Works By Fire Departments
The chief aim of the corps is to protect property from
unnecessary smoke and water damage. The protective benefits are
extended to all those who suffer fire damages regardless of
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whether they are insured or not. Training school and colleges are,
sometimes, engaged in giving general education to all and
particular education to few students to train them in fire fighting
methods and fire preventive methods.
Legislation and Regulation
National Board of fire underwriter’s fire brigade and
other such associations are engaged in fire preventive and
protective efforts under a certain law. The property owner and the
fire protection engineer must keep in mind the numerous legal
requirements relating to the various phases of fire prevention.
Apart from the above contribution to prevention protection,
the following devices are utilized for preventing the losses.
i. The insurer compensates loss at a reasonable cost.
ii. Serious hazards are to be cooperatively reinsured.
iii. Loans are provided for better construction and building.
iv. Fire insurers stimulate the installation of protective devices to
v. Fire fighting methods are organized with public utility
vi. Insurers investigate the causes of loss and attempts ate made
to reduce the causes.
Insurers study various devices for fire proof, protection
and problems of special processes. Periodical examination of
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insured property is made and instructions are issued for the
purpose of investigation.
4. SCOPE FOR FIRE INSURANCE
A contract of fire insurance is a
contract whereby the insurer agrees, in
consideration of a sum of money called
premium, to compensate another person
known as the insured for any loss or
damage to the insured property. The contract specifies the period
during which the indemnity is to last and also the maximum amount to
which the insurer can be held liable.
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The need for fire insurance arises out of the following facts:
There exists material property susceptible to damage or destruction by
fire or other peril.
1) That such material property has intrinsic value measurable in
terms of money.
2) The occurrence of fire will result in not only loss or damage
to material property, but also other consequential loss such as loss
of production, etc. in order to make the insurer liable for the loss
under the fire policy the following two conditions must be
I. There must be fire in actual sense or ignition, and
II. The fire must be accidental.
There must be actual ignition. This means that loss or damage
must be by fire. The cause of fire is not important but it should be
proved that loss was caused by fire. Ignition means burning and
therefore the presence of flame is a precedent condition.
Fire Must Be Accidental
Any loss caused by willful consent does not
come under the term ‘fire’. There must be an accidental fire and not
intentional. This applies only to the insured.
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Section 2 of the Indian insurance act, 1938, states the scope of
fire insurance to include:
1. Fire insurance business is different from other insurance
business in operation and covers the risk caused by fire.
2. In addition to the risk caused by fire, it also includes other
risk and occurrences, which can be customarily, be included
among risks insured under fire insurance contracts.
3. Thus we can divide the total scope of fire insurance into two
parts, or the scope of fire insurance may be studied from two
Ordinary scope of fire insurance
Comprehensive scope of fire insurance
1. Ordinary Scope Of Fire Insurance
Ordinary fire insurance products includes those risks,
which define the narrower scope of fire insurance viz., the
losses caused by fire only. As such, under the fire insurance
contracts the claims for losses by fire must fulfill two basic
a. There must be actual fire or ignition
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b. The fire must be incidental, not intentional
c. Risks covered under fire insurance
The risks causing losses must be mentioned under fire
insurance policy and only those risks are indemnified by the
insurer incase of loss. Usually, the following risks caused by
fire are covered under fire insurance.
i. Fire or ignition.
ii. Blasting of boiler used for household purposes.
iii. Blast of gas cylinder used for household cooking.
iv. Blast of gas etc. used for the purposes of lightening and
heating in any building.
d. Risks not covered under fire insurance policies
These are the risks for which insurance company do not
indemnify the insured in the case of loss.
i. Some goods and properties are not eligible for insurance
under fire insurance policies such as: precious stones and
metals, articles, maps, stamps, cheques, goods or
properties kept under trust, account books and records,
archives, and rare documents and writings, etc.
ii. Losses caused by certain uncertain events such as riots,
civil disturbances, revolutions, wars, aggression, internal
emergencies, marital law etc., natural calamities like
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earthquakes, storms, cyclones, floods, drought, excessive
heat or cold eave.
iii. Spontaneous fire in jungles or bushes.
iv. Spontaneous combustion caused by chemicals.
v. Theft during fire or after the breakout of fire.
2. Comprehensive Scope of Fire Insurance:
Various types of policies are available in the form of fire
insurance policies, which cover various types of risks allied to the risk
of fire. Coverage of such risks under the purview of fire insurance has
widened the scope of fire insurance. Some special policies have
helped in a great way in broadening the scope of fire insurance in the
(i) By including the excluded perils and risks.
(ii) By including consequential losses and other indirect fire risks.
In the first category, such excluded risks, which cannot
be insured under general insurance schemes or policies, have been
included under the cover of fire insurance. Such policies are called
special perils insurance relating to spontaneous combustion,
earthquakes, blasts etc.
In the second category, such indirect risks and losses are
covered. These are called consequential losses or risks.
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5. SIGNIFICANCE OF FIRE INSURANCE
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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 infrastructure 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 field that
provides security, against business risks. The role of 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
• As A Source For Minimizing Losses:
Fire can destroy property in goods and fixed assets of
crore 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
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damages to goods and property. In order to minimize this
calamity, various types 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 Fireproof 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
• 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 such items given
i. Assets Valuation:
Assets are valued for obtaining a fire
insurance policy. It requires the insured to be more
cautious in protecting his property or goods.
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ii. Loss Preventing Efforts and Advice By The
An insurer not only indemnity against fire
losses, but also advices the insured to reduce the
incidence of fire. Fire insurance companies establishes,
‘salvage corps,’ to extinguish fire so that the extent of
loss can be minimized.
iii. Helpful In Business Progress:
Due to the facilities provide by the insurance
companies, the business enterprises undertake large-scale
production, and invest in business and marketing
activities without any botheration. This lead to
continuous progress in industrial and commercial
activities, leading to extinguish fire so that the extent of
loss can be minimized.
iv. 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 relives
such entrepreneurs from worries, by indemnifying the
loss/damages, if any, from the occurrence fire.
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v. 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.
vi. Distribution of Risks:
Fire insurance is effective device to
distribute the risks in a group, enabling the individual or
the institution to maintain its efficiency.
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6. PROCEDURE OF FIRE INSURANCE
The steps to be followed in connection with affecting fire
insurance are as under:
I. Selection of Insurer:
The selection of the
insurance company is
the first step. The
insured is required to
select a suitable
company for this
purpose amongst a
large number of
companies engaged in
The proposer can select any of these companies according to
his convenience, rationality, goodwill of the company, its financial
soundness, premium rates, policies and service provided etc.
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II. Presentation of Proposal In The Prescribed Form: After the
selection of the insurance company a proposal form is obtained and
furnished with the insurer or his agent. The particulars about the
name, address, occupation of the proposer, value and nature of the
subject matter of insurance, type of policy required, amount of sum
insured, etc. are to be furnished with care and utmost good faith. All
the facts about the subject matter should be clearly disclosed.
III. Evidence of Goodwill: The proposer is required to furnish a
certificate as evidence of his goodwill along with the proposal. The
formal of this certificate is given with the proposal form itself.
Usually, the insurance agent certifies that he knows the proposer for a
period time and his reputation is good in the society. In case the
proposer will be asked to furnish such evidence from any reputed
person in the society.
IV. Recommendations By Agent: The agent also gives his
recommendations in the proposal form at the place provided for this
purpose. The insurer takes the decision to accept a proposal keeping in
view of the recommendations given by the agent.
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V. Survey of The Subject Matter: When a proposal for fire insurance is
received in the office of the company, it makes a thorough study of
the proposal and if necessary, a survey of the subject matter of
insurance is conducted. Such a survey is conducted by expert
surveyors, who will go into enquire about the conditions of the subject
matter, surrounding situations of the subject matter, risks involved etc.
The surveyors also verify the accuracy of the details furnished in the
VI. Report by Surveyors: After the survey, the surveyors present a
report to the insurance company. This report will state the physical
and moral hazards involved in the proposal. This report serves as an
important base for determining premium.
VII. Acceptance of Proposal: After determination of premium on the
basis of risk involved, the proposal is accepted and intimation is sent
to the proposer asking him to pay the premium within a specified
period of time. If the surveyors present an adverse report, the proposal
is rejected and a regret letter is sent to proposer.
VIII. Depositing of Premium Money: A lawful contract between the
insured and the insurer is entered into, when the premium money is
deposited by the insured. The risk commences as soon as the premium
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IX. Issue of Cover Note: As soon as the premium money is deposited,
the insurer issues a cover note (a provisional policy) indicating there
is that the insured has deposited the premium and the insurer has
accepted the proposal. On issue of absolute policy the legality of the
cover note ends. A cover note can also be insured pending the process
of survey of the subject matter and the premium has not been
X. Issue of Insurance Policy: When all the requirements under the risks
have been complied with, the insurer issues the policy duly stamped
and containing all terms and conditions. These terms and conditions
define the mutual rights and liabilities between the insurer and the
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7. FIRE INSURANCE – RATE FIXATION
Rate fixation on scientific basis in
fire insurance is still not fully developed as
in the case of life insurance. Under fire
insurance, after the inspection of risk,
physical hazards can be assessed but moral
hazards cannot be assessed properly.
Therefore, rate fixation is different. The
past experience can only be used as a
guideline for the estimation of risk. While fixing the rates of premium for
different risks in fir insurance, the insurer must ensure that the calculation
work is carried out as accurately as possible.
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Thus, the rate so determined should cover the probable claims and the
premiums must be equitable, stable and consistent.
System of Rate Fixation
Actual process of rating consists of two steps:
• Discrimination, and
• Scheduled rating.
The classification rating method is based upon the
experience of several years and of several persons and therefore
can be considered as superior over the personal judgment
method. Under this method, risks are classified according to
their loss experience. Properties have been classified into three
ii. Hazardous, and
iii. Extra hazardous
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Therefore different premium rates are to be fixed
for each class. While fixing the rate the following points are to be
taken into consideration:
The construction of the building has a great
impact in the fixation of the rate. Buildings made
of bricks are sound than wooden buildings. A
fireproof building is considered better than a
without fireproof building.
Occupancy means the use of the building.
The building may be used for various purposes, as
for example, general shop, hardware store, and go
down and for residential purposes.
The wooden floor in the building its an
accidental hazard and is worst than stone flooring.
In case of fire, wooden floor prove a bad risk.
The height is an extra physical hazard for
rating. The sky scrapper buildings have proved a
very bad risk in case of fire.
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Lighting, heating and power:
Short circuits may lead to fire and faulty
installation may result in combustion.
The location, the adjoining premises, the
distance from the fire brigade station or water
supply point and congestion are all-important
sources for considering the fire risk rating.
Discrimination rate system is very old system of rate
fixation in fire insurance. Under this method, premium rates are
dependent upon the judgment of a person skilled in the fire
field. All the bad factors and good factors are put together and
the rate is to be calculated. The method has many shortcomings
because personal judgment may differ and different rates may
be determined to the same risk by the different companies.
Under this method the most important factor, which
influences the rate fixation in fire insurance, is the
discrimination, i.e. differentiation. Every risk is considered
• Schedule Rating:
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Under this system of rating a normal property is
considered as ‘standard’ and for each standard risk a standard
premium is charged. For any defect, addition is made in
standard premium and for good feature deduction is made. The
main advantage of the schedule rating is that it provides
equitable treatment for all risks.
A scheduled rate means a standard rate of premium or an
average premium. The average premium rate for a particular
class of risk is determined taking into the account the total loss
and the sum insured during a period of years. For finding out
the average rate percent, the following formula is applied: the
average rate percent (R) = L/V x 100 where, R = average rate
percent, L represents ‘Loss’, V represents the total sum insured
of the subject matter. The gross or office premium is called the
‘Normal rate’ or ‘average rate’ of premium. As discussed
above, each class of risk may differ from one another and
therefore the principle of discrimination may also be applied.
8. FIRE INSURANCE CONTRACT
Fire insurance contract may be defined as “an agreement
whereby one party in return for a consideration undertakes to indemnify
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the other party of certain defined subject-matter being damaged or
destroyed by fire or other defined perils up to an agreed amount.” The
party responsible to indemnify the loss is called the insurer, the party
who is to be indemnified is called the insured, the consideration for the
contract is termed ‘the premium’, the defined subject matter is termed
‘the property insured’ the sum set forth in the contract is called the
assured sum, and the document containing the terms and conditions of
the contract is known as ‘the policy’.
8.1ELEMENTS OF FIRE INSURANCE
1.Features of General Contract:
All the features of general contract are also applicable to
the fire insurance contract.
The proposal for fire insurance can be made either verbally or in
writing. The proposer gives the necessary description of the property to be
insured. In practice the printed proposal form is used for the purpose.
Introduction, type of properties, value of properties, construction,
occupation, etc., are the various information, which are required by the
insurer. The answers to these questions must be completely correct. The
assured must disclose all the material facts and should observe utmost good
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faith. The description of the subject matter of insurance is the basis of the
contract for assessing the risk and fixing the premium.
On receipt of the proposal form, the insurer will assess the risk.
Sometimes, when the contents and subject matters are not of very high
amount, the insurer may accept on the basis of proposal forms only. When
the subject-matters is of larger magnitude and where the hazard involved is
of a variable or unknown nature, the insurer may send his surveyor to survey
the property. The surveyors being expert in the field of insurance evaluation
will consider the proposal in the light of this report. The unknown proposes
are required to submit an evidence of respectability. The insured is required
to submit a certificate from some known and respectable person about
honesty and integrity. As soon as the proposal is accepted, the assured is
informed about the decision.
C. Commencement of Risk:
The risk commences as soon as the contract is completed provided
there is no specific time for the purposes. As soon as the proposal is
accepted, risk will commence irrespective of the fact that no policy was
issued and no premium was paid. Where risks are unknown and tremendous,
the payment of premium will be the basis of the completion of the contract.
The risk will be commence only when the premium has been paid and not
before that; when the policy has been issued, payment of premium will not
be the basis of commencement of risk.
a. Cover Note:
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The insurer issues a ‘Cover Note’ or ‘Interim
Protection Note’ when the risk was accepted provisionally or
subject to the condition of payment of premium. This note will
cover the property so far the final policy has not been issued. If
loss occurs before issue of policy cover note will be sufficient
to prove insurance. The cover note, however, is not taken at par
to the policy.
The insurer issues a duly stamped policy which
will bear all the terms and condition of the contract. Any
contract of fire insurance comes within the meaning of the word
‘policy’. It is a different statutory and formal document of
insurance contract. There are a standard form is also used. The
policy contains the name and address of the insured, the subject
matter of insurance, the sum insured, the term and the premium.
There are various clauses governing the conditions of insurance
contract. The terms and conditions of the policy can be
c. Period of Fire Insurance Policies:
Usually fire policies are issued for one year and
are called ‘Annual Insurance.’ Policies issued for a period
shorter than one year are known as ‘Short-Term Policies’ and
those issued for a period more than one year are called ‘Long-
Term Policies.’ But in practice only annual policies are
common. ‘Short-term’ and ‘Long-term’ policies are rarely used.
38. FIRE INSURANCE
Long-term policies are generally issued in case of building.
Alteration in the policy will be made according to the change in
building and terms of insurance. The premium rate is
determined according to the nature, location, and construction
of the property.
Moreover, the period of insurance is also taken
into account for computing premiums.
d. More Than One Fire During A Period:
When there is more than one fire in respect of the
same subject matter insured, the insurer is not bound to pay
more than the sum assured. During the policy-life, payment of
each loss, automatically, reduces the amount of the policy by
the amount so paid. When, after payment of certain losses, the
property insured is totally destroyed, the insurer will pay loss
not more than the balance of insured amount remaining after
compensation of the previous losses.
However, if the insured is willing to get payment
of full loss, he can reinstate the assured sum to the original
amount by paying a fresh premium on a pro-rata basis to the
date of expiry.
e. More Than One Policy:
If the same subject matter is insured with more than
one insurer, he cannot realize more than the actual loss from all
the insurers. Each insurer will pay his ratable proportion of loss
39. FIRE INSURANCE
to the property insured against fire. If there is average clause,
then the insurers will pay accordingly
9. PRINCIPLE OF FIRE INSURANCE
A. Insurable Interest:
Insurable interest is the general principle of
insurance without which insurance cannot lawfully be enforced for an
insurance unsupported by an insurable interest would be a gambling
transaction. Insurable interest will be there where the subject matter
should be in such a position that the insured may suffer loss at the time
of damage and may gain by its protection. The insurable interest in fire
insurance must be present at the time of contract and at the time of loss.
Insurance contract will be invalid if the property is sold to another
party. Similarly if there is no insurable interest at the time of insurance,
the contract will be invalid.
The following conditions must be fulfilled to
constitute an insurable interest.
• There should be a physical object capable of being damaged or
destroyed by fire.
• The object must be the subject matter of insurance.
40. FIRE INSURANCE
• The insured must stand in such relationship as recognized by
law where the insured is benefited by the safety of the subject
matter or be prejudiced by its loss.
The insurable interest is the ‘pecuniary interest’. The
fire insurance is a personal contract between the insured and the insurer.
So, the transfer of interest would invalidate the contract.
The following persons have insurable interest in
the subject matter concerned.
The owner of the property or asset whether fixed
or current has as insurable interest whether he is the legal owner or the
equitable owner. The owner may be a single or joint holder. Partial
owner can take policy for full value as trustee of all the property. A life
tenant entitled to the use of the property during his lifetime only has an
An agent has insurable interest in the property of
A creditor has an insurable interest in the firm’s
A creditor has an insurable interest in property on
which he has a lien for the debt.
An insurer has it in respect of risks underwritten
by him for the purpose of reinsurance.
Where the subject matter is mortgaged, the
mortgagor has an insurable interest in the full
value thereof and the mortgage has an insurable
41. FIRE INSURANCE
interest in respect of any sum due to become due
under the mortgage.
A bailee can insure any article or property bailed.
He may be a gratuitous bailer or bailee for reward.
A trustee has insurable interest in the property put
B. Principle of Good Faith:
The contract of fire insurance is one in which the
observance of the utmost good faith – uberrima fides – by both the
parties are of vital significant. The utmost good faith in fix insurance
has two aspects – first, disclosure of material facts and second,
preservation of the property insured.
The insurer and the insured must furnish detailed
information regarding the subject –matter to be insured. The insured,
since he has more information about the subject matter, must disclose
all the information asked truly and fully. The assured is also required
to disclose all the material information which are known to him
although it was not asked by the insurer; material fact is one which
influences the decisions of the insurance. The decision may be
pertaining to the acceptance or declination or determination of the
premium. In case of fire insurance the examples of material facts are
construction of buildings. If the assured has not observed good faith,
42. FIRE INSURANCE
other party can avoid the contract. It was immaterial to plead that the
insured was unaware of the fact and could not disclose. In a given
circumstance, it is expected from the insured to know all the material
facts. The insurer has also to disclose such material facts as are within
The second phase of good faith is preservation of
property. Thus, the observance of good faith is necessary not only
during the negotiations of the contract but throughout the term of the
policy and in making claims. Any change after commencement of risk
must be communicated to the insurer. The insured or his agents as
well as the insurer must take all such steps as may be reasonable for
averting or minimizing loss. Since the insured is near to the property,
he must act to prevent the fire and if fire occurred, he must do his
utmost to extinguish it. In such cases he must act as if he was not
In the following circumstances, the insured is not
required to disclose information.
All those circumstances which diminish the risk.
All those facts, which are known or reasonably presumed to be
known to the insurer.
Information, which are of common knowledge.
43. FIRE INSURANCE
Those facts, which the insurer in the ordinary course of his
business ought to know, or which the insurer ought reasonably
to have inferred from the details given.
Those facts, which are superfluous to disclose by reason of a
condition or warranty.
D. Principle of Indemnity:
The doctrine of indemnity aims to compensate the
insured for a loss sustained, and the compensation should be such as
to place him as he occupied immediately before the occurrence. The
insured cannot claim anything in excess of the amount required to
recoup the actual loss sustained. The insurers undertake to make good
the insured's loss by monetary payment or by reinstatement or
replacement so that the insured shall be fully indemnified, but this is
subject to the sum insured. The law does not sanction any insurance,
which would enable the insured to profit by the destruction of the
thing destroyed. It will check the temptation to destroy the property
insured thereby to secure the money.
The assured amount is not the measure of indemnity
but it sets an upper limit up to which the loss can be indemnified. The
actual amount of indemnity will be the market value of the subject
matter destroyed or damaged by fire at the time and place of the
occurrence of fire. It will never exceed the assured amount. When the
actual loss is more than the assured amount then only the insured sum
will be paid and nothing more is paid. But, this principle does not hold
44. FIRE INSURANCE
good when the policy is valued policy. Here, the basis of indemnity
will not be the actual cash value of the property at the time of loss but
the insured value, which is named in the policy when it was taken. In
a valued policy, no consideration is given to the actual loss. Thus, the
amount of claim may be greater or less than the actual loss at the time
of fire in case of valued policies.
E. Interpretation of Indemnity:
The insured is entitled to perfect indemnity subject
to the sum assured being sufficient. But, in practice such perfection
may be difficult to attain. Previously, the meaning of the word
‘indemnity’ was understood in the sense of material indemnity only,
i.e., tangible and material property only. The intangible loss, i.e., loss
of profit, rent, etc., was not compensated. It worked as a great
hardship to the honest insured persons. Now, the insurance is
extended to cover not only the material loss of property insured but
also to cover the ‘consequential loss’. When a business property is
burnt not only the material loss on account of the destruction of
building, plant and stock are covered but the consequential loss of
profits on account of cessation of sales, salaries, taxes, rent, rates, etc.,
are also indemnified. Now-a-days tangible and intangible losses are
insured and the consequential loss is also within the meaning of
F. Consequences of Indemnity:
45. FIRE INSURANCE
The consequences of the doctrine of indemnity are
The insured may claim only the amount of the loss sustained.
In case of partial damage, the insured may claim compensation only
for the amount of damage done.
The insured must transfer to the insurer may rights which he may
possess against a third party in respect of the loss.
If the insured have affected more than one policy, he is precluded
from obtaining more than one complete indemnity.
Measure of indemnity varies with the type of
properly. For damaged buildings, the measure of indemnity is the cost
of repairing or reinstating the buildings to their pre-loss condition.
Similarly, for machinery, the measure of indemnity is the market
value, which is arrived at after taking into account wear and tear and
depreciation. For stock in trade, the measure is the net cost to the
insured. For stock in trade, the measure is the net cost to the insured.
The indemnification may be in the form of cash, repair, replacement
G. Doctrine of Subrogation:
Subrogation means the right of one person to stand
in the place of another and to avail him of the latter’s rights and
remedies. The principle of subrogation is just a corollary to the
principle of indemnity. The insured can realize only the actual value
of the loss or damage to the property according to the principle of
46. FIRE INSURANCE
indemnity and it follows that if the damaged property has any right
against a third party regarding that property. These must pass on to the
insurer. If the assured is allowed to retain them, he shall have realized
more than the actual loss, which is contrary to the indemnity principle.
The assured can proceed against the third party, if he so desires, and if
he recovers damages the insurer is relived of liability. If the insured
has received the full amount of loss any sums obtained from the third
party belong to the insurer up to the amount of their disbursement.
The right of subrogation is exercisable at common
law after the insurer has paid the claim made against him.
The contents of proposal form are expressly
incorporated in the policy, which form warranty. Warranty is that by
which the assured undertakes that some particular thing shall or shall
not be done, or that some conditions shall be fulfilled or whereby he
affirms or negatives the existence of a particular state of facts.
Warranties, which mentioned in the policy, are called express
warranties and those warranties, which are not mentioned in the
policy, are called implied warranties.
Warranties must be complied with literally and the
effect of a breach of warranty is to render void the relevant item of the
policy, even if no increase in risk is involved. Every warranty to
which the property insured or any item thereof is, or may be, made
subject, shall from the time the whole currency of the policies, and
47. FIRE INSURANCE
non-compliance with any such warranty, whether it increases the risk
or not, shall be a bar to any claim in respect of such property or item.
The condition states that every warranty is attached during the whole
currency of the policy and if during this period a warranty has not
been complied with, the insured will not entertain any claim in respect
of the property or item affected. However, if the policy is renewed and
there was breach of a warranty before the renewal is affected, in such
a case the claim can be made. Non-compliance with a warranty prior
to the current renewal period of a policy is not a bar to a claim. The
non-compliance with a warranty avoids a cover only during the period
of insurance in which the breach occurred.
I. Proximate Cause:
The rule is that the immediate and not the remote
cause is to be regarded – cause proximate non-remote spectature.
Proximate cause is very important in fire insurance. The principle of
proximate cause has already been discussed in detail. The insurer
48. FIRE INSURANCE
always takes the proximate cause while paying the claim. If the
property insured is burned but the fire was preceded and brought into
operation by an excepted peril, the legal position depends upon
whether the expected peril was the proximate. The remote cause is
when an incendiary bomb damaged the property; the proximate cause
is enemy action.
10. TYPES OF FIRE INSURANCE POLICIES
49. FIRE INSURANCE
There are different types of fire
insurance policies keeping in view of the various needs of business
enterprise. The important types of policies are described below: -
Average Policy: -
It is policy containing ‘Average Clause’ Average policy
refers that if a person insures his property for an amount lesser than its
value, the insurer is not bound to indemnify for the total loss of the
property, even if the claim is not more than the sum insured by the
policy. This way, the insurer shall be liable to pay in proportion to the
actual loss, in which proportion the policy amount and the real value
of the subject matter exists. The formula is an under:
Amount of indemnity = Policy money * actual amount of loss
Market value of the subject matter at the time of fire.
50. FIRE INSURANCE
‘A’ has insured his property in a fire insurance policy
containing ‘Average clause’ for Rs. 5.00 lakh. After some time, the
property partially burned by fire causing a loss of Rs. 6.00 lakh. The
claim payable to him against the loss of Rs. 3.00 lakh, by the insurance
company is calculated as under:
Amount of indemnity = Policy money * Actual amount of loss
Market value of the property insured.
= 5,00,000* 3,00,000 = Rs. 2,50,000.
Valued Policy: -
In an ordinary fire insurance policy, the insurer simply
indemnifies the insured. In the case of valued policy, the property is
valued at the time of affecting the policy and the insurer agrees to pay
the insured sum on occurrence of fire irrespective of the loss. Here in
this case, the contract is not an indemnity. Under the valued policy the
insured can recover a fixed amount, agreed at the issue of policy
without the necessity for any further proof of value at the time of fire.
This is because that the valuation was done at the time of affecting the
policy. The valued policy also is known as ‘insured policy’.
Specific Policy: -
51. FIRE INSURANCE
It is a policy under which the property is insured for a fixed or a
specified sum without taking into account the actual value of the
property. The sum assured shall be usually less than the actual value
of the insured property. The insurer’s liability under this policy arises
only when the losses reach to the extent of certain specified sum.
However, the insurer shall not be liable for indemnity more than the
Reinstatement or Replacement Policy: -
This a policy in which a clause is inserted in the policy under
which the insured can recover not the value of the buildings or the
plant as depreciated, but the cost of replacement of the property
destroyed by new property of the same kind or the insurer may
reinstate the property instead of paying in cash. In both the cases we
have the example of “New lamps for old”.
Reinstatement or replacement policy is issued for new plant and
machinery of buildings, of reputed companies.
Floating Policy: -
This type of policy is useful for the goods kept at different
places and for floating goods. For example, some of the goods of
other trader are kept in one go down, and few kept in another go
down, some are kept in the railways go down or some at the sea port.
This way, for the goods kept at different places, such a trader to cover
52. FIRE INSURANCE
the risk of goods lying at different places can obtain a floating fire
insurance policy under one policy.
The major advantage of this policy is that the insured need not
obtain different policies for the goods kept at different places. The
insured needs to declare all his goods for which the floating policy is
issued. The disadvantage for the insurer is that his risk increases.
Sometimes one can make under insurance, by which the loss will be
higher for the insurer.
The policy is suitable for those traders whose goods are lying at
different go downs, railway station or seaport for a long period, and
the possibility of risk of fire is much. The touring companies like
Circus Company, Theatre Company, and Auctioneers etc. this floating
policy is beneficial.
Declaration Policy: -
This policy is specifically aimed for wholesalers and
distributions of goods whose stocks usually fluctuate. However, this
policy is not issued for the goods lying in go downs or which are used
in manufacturing process.
At the time of effecting the policy, it is estimated that how
much of the goods are to be covered by risk during the tenure of
policy. On the basis of this estimate insurance is affected on
53. FIRE INSURANCE
maximum value of goods. The insurer shall be liable up to this limit
At the beginning, the insurer charges three-fourth of the
premium fixed on the basis of maximum values of stocks. Thereafter,
insured declares after certain time interval (monthly or quarterly
according to the duration of premium become, due) the value of his
actual stock. In the case of loss by fire, indemnity is calculated on the
basis of value of goods declared by insured, in the above manner. On
maturity of this policy, the average value of stock is ascertained and
on the basis of this average the premium is more than the initial
premium charged, the excess is claimed from the insured. On the
other hand, the initial premium charged is more than the average
premium determined at the maturity of the policy, excess amount be
returned to the insured. However, the insurance company retains 50
per cent of the initially paid premium. This way, the insure is effected
on the maximum value of the stock and the payment of premium is
made on the average stock.
The declaration policy is issued for not less than Rs. 20 lakh, in
Adjustable Policy: -
This policy is issued for existing stock. A condition a attached
with this policy that the premium rate shall adjusted according to
54. FIRE INSURANCE
increases or decrease in the value of stock. At the beginning this
policy is issued like an ordinary policy and the premium is paid in full
at the rate prescribed. It is a contract limited to merchandise or stock-
in-trade, other than farming stock. When there is variation in the value
of stock, this change is notified to the insurer by the insured. On basis
of this information, a suitable endorsement is made on the policy and
the premium is adjusted on a pro-rata basis. On the basis of
endorsement made on the policy, it is assured that the policy is
affected on such an amount. In the case of loss by fire, the amount
notified by the insured at the maturity of the policy is taken as final
and indemnified up to that limit.
In this kind of policy insured can reduce or increase the policy
amount according to his convenience and the premium is adjusted on
the basis of this increase or decrease.
This policy resembles like a declaration policy, but there are
certain differences between the two:
• In declaration policy, the stock value declared at the time of
affecting the policy remains as insured sum, whereas in
adjustable policy, the stock value declared at the last time is
accepted as sum insured.
• In declaration policy, it is essential to declare the stock at
certain fixed interval, whereas in adjustable policy, this
declaration is depends on the convenience of the insured.
55. FIRE INSURANCE
• In declaration policy, the money to be indemnified shall be
the same that declared at the beginning whereas in
adjustable policy, the value declared at the last time shall be
the amount to be indemnified.
• Although in both the policies, the premium is calculated at
the end of every year, the maximum limit of insured sum
Maximum Value With Discount Policy: -
Under this policy, the insurance is affected on the maximum
value of stock remains throughout the year, and accordingly premium
is charged. There requires neither any declaration of stock value nor
any adjustment. The insurance is affected on the maximum stock
value throughout the year and in the case of no indemnity, one-third
of the premium paid is returned to the insured at the end of the year.
The advantages of this policy is that there requires no declaration by
the insured nor requires calculation of premium at the closing of every
year. The one-third premium refunded by the insurer can be treated as
a discount in consideration of variations in value of goods. Otherwise
there is no justification for refund.
Excess Loss Policy: -
This policy is obtained where the stock fluctuate indefinitely.
The trader has to obtain two policies at a time, one for the minimum
stock of the merchandise always remain in stock and the other for
56. FIRE INSURANCE
such value the stock may increase. The first policy is known as “First
Under the cover of first policy, the loss is indemnified up to the
sum insured. If the loss exceeds this limit, that can be met out from
the Excess Loss Policy.
This policy has the advantages that with a small amount of
premium, larger risk can be covered. The premium rate for the excess
loss policy is very low in comparison to the other polices.
In the case of excess loss policy, the insured is required to
declare the actual stock every month as was needed in declaration
Ordinary or Standard Policy: -
This policy provided security against some fundamental risks.
The premium is kept at lower rate because this policy is obtained by
almost all the insured. This policy has two types:-
For household goods and
For all other purposes such as for factories, shops, go
down, furniture’s etc.
Usually this type of policies overlooks the risk factors and the
insurer is not liable for the losses. The risks, which are overlooked,
57. FIRE INSURANCE
include loss due to natural calamities, like earthquake, explosion of
lava from the earth, civil wars, strikes, explosion, etc.
Special Peril Policy: -
In addition to ordinary risks, this policy provides for coverage
of risks involving explosion, violence, etc. strikes, civil war, earth-
quake, etc. and loss due to floods, explosion of water tanks, explosion
in the air by collision between two air. Crafts, loss to the insured
properties by transport vehicles etc. Additional rate premium is
charged for undertaking special kinds of perils.
Comprehensive Policy: -
This policy not only undertakes full protection against risk of
fire, but also combined with risk of burglary, riot, theft, pest, damage,
lightning etc. This policy is also known as “All in policies”. The
major advantage of this policy to the insurer is the higher rate
premium, while the assured is protected against losses from other kind
Sprinkler Policy: -
This policy insures destruction of or damage due to accidently
leaking water from automatic sprinkler installation, used in the
insured premises to put out fire.
58. FIRE INSURANCE
The policy contains various conditions relating to maintenance
of sprinkler, up keeping and operation.
Rent Policy: -
This policy protects the building owners from the loss of rent. If
a tenant does not pay rent because of fire in the rented portion, the
insurance company will pay for such loss.
This may constitute a separate policy, or can be included within
other forms of cover and may be affected either by the owner, or by
the tenant or by an owner-occupier. If the tenant is not paying rent
because of fire, the owner can claim rent from the insurer. If a tenancy
agreement requires for such insurance, the tenant should insure under
this policy. In the event of fire, the owner-occupies would be required
to pay for alternative accommodation during the period of repairs and
Transit Policy: -
A transit policy covers goods in the course transit from one
place to another by rail, road, air or sea transport. The policy protects
the loss due to damage or loss in transit. But reaching the goods to the
Builder’s Risk Insurance: -
59. FIRE INSURANCE
This policy is insured for loss by fire against buildings,
including machinery and equipment during the process of
construction, as well as such materials incidental to the construction
work. This policy is also known as contractors’ risk or contract works
risks policy. At the beginning this policy is issued for a minimum sum
and accordingly to progress of construction work, the sum insured is
Long-Term Policies: -
Policies for a period exceeding 12 months shall not be issued
except for “Dwellings.”
11. CASE STUDY- ICICI LOMBARED
General Insurance Company Limited
ICICI Lombard General Insurance Company Limited is India’s No. 1
general insurance company as well as the first Indian general insurance
company to be ISO 9001: 2000 certified.
60. FIRE INSURANCE
ICICI Lombard General Insurance Company Limited is a 74:24 joint
venture between ICICI Bank Limited and the US-based $26 bn Fairfax
Financial Holdings Limited. ICICI Bank is India’s second largest bank;
while Fairfax Financial Holdings is a diversified financial corporate engaged
in general insurance, reinsurance, insurance claims management and
investment management. ICICI Lombard combines the forte of two of the
most trusted names in the financial sector: ICICI Bank’s strong brand equity,
extensive distribution network, and sound technological infrastructure to
serve customer needs, along with Lombard’s domain knowledge, product
innovation, and business processes, based on international practices in the
insurance business. In a period of two years, the company grew from 110
employees to 1,100 and from 20 offices to a 100 offices. The entity has been
reaching our to the Indian market on the basis of its customer access to a
range of customized and innovative insurance solutions. In all these years,
that ICICI Lombard has been around, it has evolved both in its business as
well as its IT deployment.
Commencing operations in September 2001, ICICI Lombard is one of
the first private sector general insurance players to achieve break-even levels
in the first full year of its operations. Over time, as the business portfolio
expanded, the company began shifting its focus from corporate markets to
the retail market in general insurance.
61. FIRE INSURANCE
ICICI Lombard deals with various insurance products in the personal,
rural, travel, and business sectors. The products range is captured in Table.
Rural Insurance Business
Health Tractor Burglary Domestic Travel
Home Weather Industrial all risk Individual
Motor Shop Consequential
Student medical Farmer’s
Accident Fidelity Corporate
ICICI LOMBARD Financial Highlights
Figures in numbers
No. Of policies sold 6,07,926 14,61,039
No. Of claims
62. FIRE INSURANCE
No. Of employees 1,249 2,283
No. Of offices 96 154
No. Of employees
Figures in numbers
63. FIRE INSURANCE
Financial Highlights 2004-05 6,07,926 84,970
No. Of employees
No. Of offices
Figures in million
Financial Year 2004-05 2005-06
Profit Before Tax 539 545
Profit After Tax 484 503
Share Capital 2,200 2,450
Net Worth 2,494 3,729
Investments 4,641 9,065
Total Asset 7,689 16,391
64. FIRE INSURANCE
2004-05 Gross Written
Profit Before Tax
Profit After Tax
2005-06 Gross Written
Profit Before Tax
Profit After Tax
65. FIRE INSURANCE
Macro Picture Of General Insurance
Overall Business Performance of GIC 2005-06
Net Premium 14,246 54,713
Incurred Claims 9,277 45,731
% Of Net Premium 65.1 83.6
Net Commission 4,780 14,023
% of Net Premium 33.6 25.6
% Of Net Premium 1.0 0.8
% Of Net Premium -3.59 -17.95
Inv. Income app to
% Of Net Premium 15.8 20.0
% Of Net Premium 12.2 2.1
66. FIRE INSURANCE
67. FIRE INSURANCE
% Of Net
% of Net
% Of Net
% Of Net
Inv. Income app
% Of Net
% Of Net
68. FIRE INSURANCE
12. CLAIM PROCEDURE UNDER FIRE
A set procedure is followed for the settlement of claim under
fire insurance. The procedure is as follows:
Notice of Fire: -
As per conditions of fire insurance policy, immediately after the
occurrence of fire, the notice of fire is given to the insurance
company, in writing. This is necessary for the insurance company to
make preliminary investigation that deem expedient. Delay in giving
notice of fire may severely prejudice the interest of the policyholder.
Presentation of Claim: -
After giving necessary notice of information of fire, the insured
must present the claim to the insurer in the prescribed claim form. The
claim in the prescribed form should be submitted within 15days from
the date of fire. This period of 15days can be increased by the
permission of the insurer. All the facts should be correctly be
furnished in the claim. Usually, the following types of information are
given in the claim: -
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a. Complete details of the losses giving the date, time
and place where the incident took place.
b. Causes of loss.
c. Details of damaged property, value of the property at
the time of fire, value of salvage and the claim
d. Subject matter of insurance and loss to every
e. Full details of the other policies insured against the
same subject matter.
Presentation of Necessary Documents:-
The following documents and evidence are enclosed with the
a. A declaration about the claim and about related facts
b. The evidence of all details, books, records, statutory
books, plans, vouchers, document, certificate and
other information that give the proof of loss by fire
and that create the liability on the insurer.
c. Any other necessary document, witness, certificate
etc. that is required under the conditions of fire
70. FIRE INSURANCE
In case these documents could not be presented together with
the claim, they may be sent within 6months, failing which the insurer
can reject the claim.
Action By The Insurance Company: -
On receipt of claim, the office of the insurance company. It may
issue the receipt of the claim. After that, the claim department
undertakes thorough scrutiny of the claim on the basis of documents
and witnesses presented by the insured with the claim. After that a
‘Claim Ticket’ is prepared and entered it in the ‘Claim intimation
Register’. This way the claim file is prepared with claim number.
Survey and Loss Assessment: -
On receipt of notice of information and claim from the insured,
the insurer arranges to undertake survey of the lost properly with help
of expert surveyors and loss assessors.
As per provision of insurance Act, 1938, no insurance company
accepts the claim exceeding Rs. 20,000/- or more unless it receive the
reports of the surveyors about the actual loss of the subject matter.
Such a survey is necessary to find out under what conditions and
causes the fire occurred, and what would be limit of company’s
liability in this behalf. This survey is calculated by visiting the spot
71. FIRE INSURANCE
where the fire took place. Under the conditions of fire insurance, it is
the duty of the insured to extend all necessary assistance and
cooperation to the surveyors and assessors.
The surveyor’s reports usually contain the following information: -
a. Causes of loss occurred.
b. Proximate cause of fire.
c. Assessment of loss.
d. Indirect loss or expenses to insured.
e. Details of expenses made towards assessment of loss.
Mention about the policies obtained by insured from other fire
insurance companies on the same subject matter and the amount of
contribution on the part of the insurer.
Settlement of Claim: -
When the report is received from the surveyors and assessors of
loss, the insurance company takes further steps to settle the claim. The
company studies the reports and the claim received from the insured
thoroughly. In case the claim money charged by the insured and that
calculated by the assessors do not make any difference, the company
takes the decision immediately to make any difference; the company
takes the decision immediately to make the payment of claims. On the
other hand, if there is difference in the claim amounts, the insurance
72. FIRE INSURANCE
company takes the decision to pay the claim money calculated by the
In case there is any provision in the policy for reinstatement,
the company assesses the reinstatement value and reinstates the
property instead of payment of claim by cash.
In connection with the settlement of claim, an insurance
company should take into consideration the following matters.
a. Double Insurance: - Where the insured has obtained
policies for the same risk from different companies;
the claim is not covered by one policy, but under all
the policies. Every insurer in such a situation, liable to
contribute towards the total loss in proportion to the
sum assured when each.
b. Under Insurance: -Where the insured gets his
property insured with under the value of his property,
a situation of under insurance arises. In such a
situation, the insured is deemed to be the insurer for
the difference of value between the value of the
property and sum assured. For this amount, the
insured is liable proportionately to the loss and the
insurance company is liable to pay average
proportionate loss. As such, the insurer should keep
73. FIRE INSURANCE
this fact in mind where the insured takes under
c. Losses At Different Times During The Tenure of
Policy: -The loss to the insured property at various
times is possible during the tenure of the policy. The
general rule in this case is that whenever the claim is
paid, that paid claim money is reduced from the total
sum insured. This way the sum insured gradually
reduces. By paying additional premium, the sum
assured can be increased again.
d. Arbitration: - Where the insured is not satisfied with
the claim paid by the insurer, the dispute can be
referred to arbitration as per conditions of insurance
policy. The decision given by arbitrator shall be
binding on both the parties. But the matter can be
taken to court if any of the parties is not satisfied by
the decision of arbitration.
Where the claim is finalized, the payment is made by a cross
cheque to the insured’s.
74. FIRE INSURANCE
Indian Insurance Companies have come a long way since
independence & more after Liberalization, Privatization, and
Globalization (LPG) era, however they have to cover some distance
so as to be benchmarked with the for sure that the reforms process is
on & the insurance companies are in right directions
In the project study of “FIRE INSURANCE” we can see that
the scope & significance of it to such an extent that every insurance
company is handling it with due care, as the scope insurance business
has widen to from national boundaries to global or international
75. FIRE INSURANCE
From the topic of “FIRE INSURANCE” a more reformed &
deep study of the same is made. This project study not only covers
various aspects of the same & is a very good example through which
we can measure the growing need, scope & significance of the same.
This project report has not only given an opportunity to me to
prepare a project on the subject above topic but it has also given me a
chance to understand this topic more effectively but has also increased
my own knowledge of the topic.
14.Bibliography & Webliography
Modern concept of Insurance -M.N.Mishra
Taxmann’s Insurance law Manual
Insurance principles & pratices-M.N.Sharma
Insurance principles & practices-M.G.Methew.
Icfai.insurance - Magazines