Question

Explain the types of fire insurance policies.

Answer 1

Fire insurance provides protection against the risk of damage to property by fire. Any property which is subject to damage by fire can be insured. Insurer undertakes to indemnify the loss incurred due to fire within specified time period. The insured has to pay premium. The amount of premium depends upon the value of subject matter, place of storage and extent of risk involved. The loss due to lightening and explosion is also covered under fire insurance.

The types of fire insurance policies are as follows:

1. Valued Policy: Under this policy, value of the subject matter of insurance is agreed upon at the time of making insurance contract. The insurer has to pay the agreed value to the insured in the event of loss by fire, irrespective of the extent of loss. This policy is generally taken for goods whose value becomes difficult to calculate in case of loss by fire.
   E.g.: Art work, Sculptures, Paintings, Antique articles etc.
2. Average Policy: This policy contains an average clause. When the subject matter of insurance is undervalued (i.e. the insured value is less than market value), then in the event of loss by fire, the insurer is liable to pay only that percentage of loss for which the subject matter has been insured.
   E.g.: A good worth ₹ 50,000 is insured for the value of ₹ 40,000 (i.e., only 80% is insured). Suppose the loss due to fire is ₹ 30,000. In this case, the insurance company shall pay only ₹ 24,000 (i.e., 80% of the loss).
3. Specific Policy: Under this policy, property is insured for a specific sum irrespective of the market value, i.e., the actual value of the subject matter is not considered. In case of loss, insurer has to pay the stated amount to the policy holder.
   E.g. Mr. A takes a policy of ₹ 90,000 for an article valued at ₹ 1,50,000. In case fire occurs and Mr. A incurs a loss of ₹ 40,000, then insurance company will pay entire ₹ 40,000 to Mr. A and not just the proportionate amount.
4. Floating Policy: When goods are lying at different locations or godowns or warehouses, a floating policy is used to insure the risk. In this case, a specific policy cannot be taken because the quantity of goods lying at different location keeps fluctuating. Fluctuating policy is taken for one single sum and single premium amount is paid for all goods lying at different locations. The insurance company is liable to pay insured in case of damage at any of the locations.
5. Excess Policy: Excess policy is taken when the value of goods or stocks keeps fluctuating. In such case, usually two policies are taken.
   1. The value of first policy is amount equal to the minimum value of stock, i.e., the value of stock never falls below that value.
   2. The value of second policy is amount equal to the difference between minimum and maximum possible stock value. This policy is taken to cover the excess value by which the price fluctuates.
      E.g.: If the minimum stock value is ₹ 1,00,000 and maximum value is ₹ 1,50,000, then the first policy will be of ₹ 1,00,000 and second will be of ₹ 50,000.
6. Reinstatement Policy: Under this policy, insurer replaces the property or goods instead of paying compensation in the event of loss by fire. The rate of premium is higher in case of reinstatement policy. While settling the claim and paying compensation, the depreciation incurred on the property is not considered.
7. Comprehensive Policy: Generally, a fire insurance policy does not cover losses due to riots, war etc. When different types of risks such as fire, explosion, earthquakes, floods etc. are to be covered under one single policy, comprehensive policy is used. Thus, the insured need not take different policies to protect against various risks.
8. Consequential Loss Policy: Although fire insurance is originally purchased to indemnify only the material loss, the consequential loss policy includes the loss of tangible as well as intangible properties. It provides an indemnity to the insured for the loss of net profits, payment of standing charges and expenditure in respect of increased cost of working.
9. Sprinkler Leakage Policy: Sprinkler leakage policy covers the damage to property on account of automatic sprinkler system which leaks or discharges water accidentally; rather than due to fire and smoke. However, is does not cover the discharge or leakage of water due to heat resulting from fire, repair or alteration of building, earthquake, war, explosion.