Fire Insurance in India

What are the Types of Fire Insurance in India?

Fires and similar incidents leading to financial losses have become increasingly prevalent in recent times. These events result in significant damage to both property as well as goods. Therefore, it becomes crucial to acquire a fire insurance policy to mitigate potential losses. This insurance coverage is designed to protect against financial setbacks arising from asset damage caused by fires or other covered perils. Consider purchasing a fire insurance plan under the following conditions –

  • As an owner of goods and/or property.
  • If you operate as a pawnbroker or pawnee – where a pawnbroker lends money based on a pawned asset, and a pawnee lends money against a pawned asset.
  • If you are a mortgagee, representing a financial institution that lends money based on the mortgage of an asset.
  • In the role of an assignee official receiver overseeing assets in insolvency proceedings.
  • If you own a warehouse and are responsible for goods stored in it.
  • As an individual with lawful possession of any goods or property.

Inclusions within Fire Insurance Policies

Fire insurance policies provide coverage for damages caused by fire and losses resulting from various other perils. Included among the typical perils covered by these policies are the following –

  • Lightning
  • Damage caused by an aircraft
  • Strikes, riots, or any malicious acts resulting in damage
  • Storms, typhoons, floods, and inundation (collectively known as STFI)
  • Impact damage from collisions with road or rail vehicles, animals, etc.
  • Subsidence, rockslides, or landslides
  • Overflowing or bursting of water tanks, pipes, and other apparatus
  • Damages resulting from missile testing operations
  • Fire, explosion, or implosion
  • Water leakage from automatic sprinkler installations
  • Bush fires

Exclusions under Fire Insurance Policies

While fire insurance policies provide coverage for various perils beyond fire, it’s important to note that they also come with certain common exclusions. Exclusions in fire insurance policies encompass losses incurred in specific scenarios, such as:

  • Fire losses resulting from earthquakes
  • Perils associated with war, invasion, and similar circumstances
  • Perils like martial law, insurrection, or rebellion
  • Losses stemming from underground fires
  • Damage incurred when the insured property is intentionally burned on the directives of a public authority
  • Losses due to theft during or after a fire incident
  • Exclusion of losses caused by spontaneous combustion
  • Losses attributed to nuclear perils
  • Losses arising from pollution and/or contamination
  • Any form of consequential losses

Various types of fire insurance policies are available in India

In India, different individuals can choose from various types of fire insurance plans tailored to their specific coverage requirements. These plans cater to both fixed assets such as buildings, plants, and property, as well as goods and stocks associated with business operations. The commonly available fire insurance plans include the following –

For Goods, Stocks, and Other Non-fixed Assets

  • Declaration Policy: A declaration policy is well-suited for assets with varying values throughout the year, such as business stocks. This policy involves establishing a provisional sum insured for which the premium is paid. The provisional sum insured serves as the maximum risk for the insurance company. At the end of each month, the highest value reached by the fluctuating asset is documented and declared. Subsequently, the average of the declared values is computed, establishing the actual sum insured for the policy. In cases where the actual sum insured is less than the provisional sum insured, a refund on the premium can be claimed.
  • Floater Policy: This policy is well-suited for assets situated in diverse locations. It allows the consolidation of all assets under a single policy on a floater basis. To secure coverage, it is necessary to specify each location and the corresponding value of the assets at each location.
  • Specific Policy: The policy provides coverage for losses up to a specified amount, known as the sum insured. Typically, this sum insured is set at a value lower than the actual worth of the asset.
  • Floater Declaration Policy: This particular policy merges the characteristics of both a floater policy and a declaration policy. It allows for the inclusion of assets situated at various locations with fluctuating values throughout the year under a unified coverage.
  • Valued Policy: For assets with unassessable market values, a valued policy offers insurance coverage. This policy allows coverage for a predetermined value agreed upon for the asset, representing the most accurate estimate of its market worth.
  • Comprehensive Policy: Just as the name implies, a comprehensive policy provides extensive coverage, protecting the asset against a wide array of perils.
  • Average Policy: An average policy operates under the ‘Average Clause’ principle within the framework of a fire insurance policy. The Average Clause comes into play when the sum insured is lower than the actual value of the goods. In such instances, upon making a claim, the full amount isn’t granted. Instead, the settlement is calculated proportionally to the sum insured. For example, if an asset is valued at INR 1 lakh and you opt for a sum insured of INR 80,000 (covering 80% of the asset’s value), a claim settlement of 80% would apply. So, if the claim is INR 50,000, the insurance company, applying the average clause, would disburse a claim of only INR 40,000.
  • Valuable Policy: In this particular plan, the determination of the sum insured doesn’t occur during the policy purchase. Instead, the claim amount is computed at the time of loss, considering the market value of the asset.
  • Consequential Loss Policy: The policy provides coverage for the profit loss that may occur in the event of a fire disrupting your business.

For Fixed Assets

  • Reinstatement Value Policy: A reinstatement value policy functions as an additional provision within the replacement value policy. With this clause, the insurance company commits to restoring the damaged property to its original state before the loss occurs. The reinstatement clause exclusively applies to fixed assets such as buildings, excluding other types of assets. It’s important to note that coverage on a reinstatement basis is only provided if the policyholder opts for the reinstatement clause in their fire insurance policy. In the absence of this selection, claims will be settled based solely on the replacement value.
  • Replacement Value Policy: This policy operates by replacing a damaged asset covered by the policy. The insurance company compensates the replacement value of the affected asset, which is determined by the market value minus depreciation, considering the asset’s age. When it comes to insured properties, the policy covers the construction cost. For other assets, the claim is calculated and paid based on their replacement value.

 

Which type of Fire Insurance Policy should you buy?

With the array of fire insurance plans in the market, choosing the right policy might seem confusing. To help navigate this decision, certain factors should guide your choice of the insurance plan. Consider the following factors when determining the most suitable policy for your needs –

The Nature of the Asset that you want to Insure

As mentioned before, various plans cater to different types of assets. Replacement value or reinstatement value policies are suitable for property and fixed assets, whereas different policies are available for other asset categories. Therefore, opt for a policy that aligns with the specific nature of the asset you intend to insure.

Exposure Risks

Evaluate the risks that your asset may be exposed to and then select the most suitable policy.

The type of risk that is being covered

Select a policy that aligns with the specific risks you encounter. Opt for a floater policy if you need to insure assets across multiple locations. If the accurate valuation of your assets proves challenging, a valued policy would be more appropriate. Therefore, make your policy choice based on the particular risks you are exposed to.

Coverage Duration

Before you pick the right fire insurance policy, it's important to understand how long you want the coverage to last.

Documents needed for Registering a Claim in Fire Insurance

If you need to make a claim, make sure to provide the following documents to register your claim with the insurance company:

  • A copy of the policy bond, including the schedule of benefits and any attached clauses.
  • Completely filled out and signed fire insurance claim form.
  • Newspaper cutting reporting the fire incident (if available).
  • Previous claim records, if applicable.
  • Photographs depicting the damages incurred.
  • Police FIR (First Information Report).
  • Report from the fire brigade.
  • Forensic report, if accessible.
  • Final investigation report.

After you’ve registered the claim, the insurance company will conduct a survey, and following that, the claim will be settled.

Securing fire insurance is an important step in protecting your assets against potential losses. While losses may be inevitable, making a smart choice and investing in the appropriate type of fire insurance policy allows you to protect yourself against these losses.