IC-57 Fire and Consequential Loss Insurance Chapter 1 PDF

CONTENTS Chapter no. Title Page no. 1 Basic Principles and The Fire Policy 1 2 Add On Covers and Special Policies 31 3 Fire Hazards and Fire Prevention 63 4 Erstwhile Tar...

CONTENTS Chapter no. Title Page no. 1 Basic Principles and The Fire Policy 1 2 Add On Covers and Special Policies 31 3 Fire Hazards and Fire Prevention 63 4 Erstwhile Tariff – Rules and Rating 91 5 Documents 113 6 Underwriting 135 7 Claims - Legal Aspects 169 8 Claims – Procedural Aspects 199 9 Consequential Loss Insurance - I 223 10 Consequential Loss Insurance – II 251 Specialised Policies and Overseas 11 281 Practice  CHAPTER 1 BASIC PRINCIPLES AND THE FIRE POLICY Chapter Introduction This chapter aims to explain the terms of a fire insurance contract and the various principles which form the foundation of insurance. The principle of insurable interest forms the basis for deciding who can take insurance and for whom. You will see how the principle of indemnity ensures that insurance can be used only to shield one from potential loss and not to profit from it. You will also learn how the principle of subrogation ensures that the insurance company does not suffer losses by paying claims for the mistakes of some negligent third party. And finally, you will also appreciate why you should disclose all relevant information at the time of taking an insurance policy, as specified by the principle of utmost good faith. You will also look at how erstwhile Fire Insurance Tariff and the different clauses governing a fire insurance policy are applicable in practice. Learning Outcomes A. Basic Principles and the Fire Insurance policy B. Implications of Fire Tariff IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 1 CHAPTER 1 BASIC PRINCIPLES AND THE FIRE INSURANCE POLICY A. Basic principles and the Fire Insurance Policy 1. Introduction Fire insurance business has been defined in Section 2 of the Insurance Act, 1938 as: Definition The business of effecting, otherwise than incidentally to some other class of insurance business, contract of insurance against loss by or incidental to fire or other occurrence customarily included among the risks insured against in fire insurance policies. The subject matter of fire insurance may be any kind of moveable and immovable property having pecuniary value, i.e., financial value of building, furniture, fixtures and fittings, household contents, plant, equipment and machinery, stocks and merchandise in premises or in the open etc. The definition above refers to “fire or other occurrence customarily included among the risks insured.” These risks are classified as i. social perils, e.g. riot, strike, etc., ii. natural perils e.g. storm, flood, etc., and iii. miscellaneous types of perils, e.g. aircraft damage, impact damage by road / rail vehicle, etc. Important Material damage caused by fire or these allied perils is covered under fire insurance. In addition to material damage, there may be consequential losses, e.g., loss of production resulting in loss of profits, etc. These losses are covered under a separate insurance Policy known as Consequential Loss (Fire) policy which is dealt with in chapters 9 and 10. Definition Fire Insurance contract may be defined as an agreement between the insurers and the insured whereby the insurers having received premium, undertake to make good the financial loss, (subject to the sum insured) suffered by the insured as a result of damage or destruction of the insured property by fire or other specified perils, during a stated period. 2 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE BASIC PRINCIPLES AND THE FIRE INSURANCE POLICY CHAPTER 1 Fire Insurance contracts are governed by the general law of contract as embodied in the Indian Contract Act, 1872, and a fire insurance contract must have the following essential ingredients in order to make it enforceable at law: i. Offer and acceptance ii. Consideration iii. Agreement between the parties iv. Legal competence of the parties to the contract and v. Legality of the contract 2. Basic principles Fire insurance is governed by basic principles evolved under common law. These are discussed below: Diagram 1: Basic principle IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 3 CHAPTER 1 BASIC PRINCIPLES AND THE FIRE INSURANCE POLICY a) Utmost good faith In insurance contracts, the legal doctrine of utmost good faith applies. The insured has the duty to disclose all material facts, which have a bearing on the insurance. A breach of this duty may render the contract void or voidable depending upon the nature of the breach. The duty of disclosure of material facts, under common law, ceases when the contract is concluded. However, condition 3 of the fire policy provides that the insured should give notice to insurer if there are any material alterations during the currency of the policy. Hence the duty of disclosure continues throughout the currency of the policy. The fire proposal form includes a declaration by the insured that the statements are true and that it shall form the basis of the insurance contract. The duty of utmost good faith becomes a contractual duty and statements in the proposal form are converted from mere representations into warranties and have to be literally true. Where the premises are surveyed by the insurers, they are deemed to have acquired the material information concerning the risk and the insurer cannot later penalise the insured for non-disclosure or misrepresentation unless he is able to establish that the insured deliberately withheld any information from or made any wrong statement to the surveyor. According to this principle the insured is also expected to act as if he is uninsured at all times and safeguard his property from the perils, and following a loss the insured is expected to salvage as much of the property as possible and ensure proper firefighting operations. b) Insurable interest The requirement of insurable interest gives legal validity to insurance contracts and distinguishes them from mere wagers. Insurable interest may be defined as the legal right to insure which arises out of a pecuniary relationship between the insured and the subject matter of insurance whereby destruction or damage to the latter involves the insured in financial loss. Absolute legal ownership affords a clear example of insurable interest. A number of other persons may also have insurable interest. 4 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE BASIC PRINCIPLES AND THE FIRE INSURANCE POLICY CHAPTER 1 Example A bank or a financial institution which has advanced money on the security of property possesses insurable interest in the property, to the extent of the amount of loan and interest outstanding. In practice, insurance is granted in the joint names of the owner and the bank subject to the Agreed Bank Clause incorporated in the policy. (This clause is dealt with in chapter 2). In fire insurance insurable interest should exist at the time of taking the policy, continue throughout its currency and should exist at the time of a loss. Fire insurance policies are personal contracts. Hence, if the property is sold or transferred, the policy is not transferred automatically. Transferring the policy in the new owner’s name has to be agreed to, accepted and endorsed on the policy (see condition 3 of the fire policy). c) Principle of indemnity Fire insurances are contracts of indemnity – that is, their object is to place the insured, as far as possible, in the same financial position after a loss as that object was immediately before the loss. Definition The principle of indemnity means insured is indemnified only to the extent of his loss; no profit or undue benefit is allowed The indemnity is subject to the sum insured and other terms of the policy. The sum insured can be fixed on reinstatement or market value, or agreed value. Let us understand these terms below: i. Market Value Definition The term “market value” or “actual cash value” means, for insurance purposes, the present cost of construction of similar building, after deducting from the cost, depreciation based on age, usage, maintenance etc. Similarly, for plant and machinery, market value is arrived at by deducting suitable depreciation for age, usage, wear and tear, etc., from the current replacement costs. In all these cases, depreciation refers to actual intrinsic physical depreciation and not the depreciation rates used for accounting purposes or for the purpose of income tax to arrive at the book value or written down value in the books of account. IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 5 CHAPTER 1 BASIC PRINCIPLES AND THE FIRE INSURANCE POLICY ii. Book Value Definition Book value is the value of the property as indicated in the insured’s books of accounts. It is arrived at by applying depreciation on the original cost of the property. At some point of time this value may be nominal and not adequate for insurance purposes. Book value is never the right method of determining sum insured for insurance purpose. Book value will always vary due to appreciation or depreciation in cost or reinstatement of similar property on the date of claim later. iii. Reinstatement Value (RIV) Definition Reinstatement value is the value at which the damaged property can be reinstated or replaced by new property of the same kind, without deducting depreciation. Reinstatement value is different from reinstatement condition (condition no. 9) of the policy. Reinstatement value is a choice offered to the insured for obtaining better indemnity. As per condition no 9 of the policy, choice of reinstatement of property vests with insurer post loss payment. (reinstatement value policy is explained in chapter 2 ) iv. Agreed value Agreed value, is dependent on the type of property and the intention of parties to the contract subject to Valuation Certificate acceptable to the insurers. This method is resorted to in the case of obsolete machinery or heritage buildings where depreciation is not a material factor and availability of similar type of property is not possible. 6 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE BASIC PRINCIPLES AND THE FIRE INSURANCE POLICY CHAPTER 1 Following are the bases on which sum insured can be fixed: Property Sum insured Buildings Plant, Machinery and Accessories Market Value Or Fixture, Furniture & Fittings Reinstatement Value Electrical Installation Other contents like household effects and contents in Market value shops, etc. Properties whose market value cannot be ascertained e.g. works of Art, manuscripts, obsolete machinery, Agreed value heritage buildings etc. Stocks Raw material Market Value, i.e. the cost at which the insured can purchase it in the market to replace the damaged raw material. Semi-finished goods Market Value, i.e. the cost of raw materials including the expenses incurred up to the stage it has been processed. Finished goods Market Value, i.e. the cost of raw materials plus all the overhead expenses incurred till it reaches the finished goods stage. Selling price which includes the profit cannot be the sum insured. Important To sum up, the following points should be noted: i. The sum insured is always to be fixed by the insured. ii. The sum insured is the maximum limit of liability under the policy. iii. The sum insured is the amount on which the rate is applied to arrive at the premium. iv. The sum insured should represent the actual value of the property insured. If there is over-insurance, there is no benefit to the insured; if there is under-insurance, the claim amount will be proportionately reduced by applying pro-rata average. (This is explained later in this chapter). IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 7 CHAPTER 1 FIRE TARIFF d) Subrogation The principle of subrogation is a corollary of the principle of indemnity. If the loss suffered by the insured is recoverable from third parties who are responsible for the loss, the insured’s rights of recovery are transferred or subrogated to the insurers when they indemnify the loss. e) Contribution The principle of contribution which is also a corollary of the principle of indemnity provides that if the same property is insured under more than one policy, insured cannot recover more than the loss suffered; he can recover only a rate-able proportion of the loss under each policy. (Both these principles are reiterated in the policy conditions to give additional emphasis.) Test Yourself 1 The principle of subrogation and principle of contribution are corrolories to which principle of insurance? I Principle of proximate cause II Principle of utmost good faith III Principle of insurable interest IV Principle of indemnity B. Fire Tariff 1. Introduction Fire insurance business was governed by the All India Fire Tariff (AIFT). The Tariff Advisory Committee have laid down rules, regulations, rates, advantages, terms and conditions for fire insurance business in India under the provisions of Part IIB of the Insurance Act, 1938 (as amended). The Tariff is statutorily binding on all insurers and any breach of the Tariff shall be a breach of the Act, (vide provisions of Sections 64 UC (4) and (5) of the Insurance Act, 1938 as amended). The IRDA, after extensive discussions through its Advisory Councils withdrew the rating part of the tariffs effective from 1st January, 2007. It was also decided that tariff regulations other than those relating to rating viz. clauses, warranties, policy wordings etc., shall be followed until decided otherwise. 8 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE FIRE TARIFF CHAPTER 1 The tariff was structured into eight sections with an Annexure consisting of specimen clauses. Section I General rules and regulations Section II Standard fire and special perils policy Section III Dwellings, offices, hotels, shops etc. Section IV Industrial / manufacturing risks Section V Utilities located outside the industrial / manufacturing risks (stand alones) Section VI Storage risks outside the compound of industrial / manufacturing risks Section VII Tank farms / gas holders outside the compound of industrial / manufacturing risks Section VIII Add-on covers Annexure Specimen copy of clauses Important i. The rates and percentages provided in the Study Text are for illustrative purposes only. ii. These rates are not to be used for official purposes. These rates and percentages are subject to change from time to time. iii. The readers are not expected to memorise these rates and percentages. 2. Standard Fire and Special Perils Policy The policy form consists of a) Operative clause, b) General exclusions and c) General conditions Note: The standard fire and special perils policy is hereinafter referred to as the ‘fire policy’. a) Operative Clause This clause consists of three parts: preamble, limitation of the sum insured and perils covered IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 9 CHAPTER 1 FIRE TARIFF Preamble The first part recites the parties to the contract and provides that if after payment of premium, the property insured described in the schedule, be directly destroyed or damaged by any of the perils specified during the period of insurance or during renewal of the policy for which premium is received, the company shall pay to the insured subject to the terms of the policy the value of the property at the time of its destruction or the amounts of such damage or at its option reinstate or replace such property. Limitations of the sum insured The last part of the clause provides that liability of the company shall in no case exceed in respect of each item the sum insured thereon or in the whole the total sum insured specified in the schedule. Perils covered The perils covered are now dealt with as hereunder: i. Fire Definition The term ‘fire’, for insurance purposes, means actual ignition or burning, under accidental or fortuitous circumstances, so far as the insured is concerned. Excluding destruction or damage caused to the property insured, by:  its own fermentation, natural heating or spontaneous combustion  its undergoing any heating or drying process  burning of property insured by order of any Public Authority Exclusions Loss by fermentation, natural heating or spontaneous combustion, heating or drying process is not an accidental loss but rather an inevitable loss under certain circumstances. Example Spontaneous combustion results from internal heating which takes place in certain substances (e.g., hay, coal) when stocked or stored in bulk. 10 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE FIRE TARIFF CHAPTER 1 However, to understand the effect of the exclusion, the words ‘its own’ are important. The effect of these words is to exclude liability in respect of that property actually affected by spontaneous combustion, etc., or by heating or drying process, and not in respect of other property damaged by fire, so originated. Example If a haystack is ignited through spontaneous combustion and the fire spreads to other haystacks, the exclusion would apply to the first haystack only, the subsequent losses being payable. To give another example, if sugar undergoing refining process through the application of heat, is damaged by excessive heating, the loss is not payable. (Note: Spontaneous combustion peril can be insured on payment of extra premium. See chapter 2) Once there is a ‘fire’ within the meaning of the Fire policy, the following losses are also payable: Direct consequences of damage during or immediately following a fire caused by  Smoke;  Scorching  Falling walls. Damage caused by fire brigade persons to minimise losses in the discharge of their duties e.g.  damage caused by water  damage caused by blowing up the property to prevent spreading of fire Damage to property removed from a burning building caused by exposure to weather, provided the removal was made in an endeavor to mitigate the loss. ii. Lightning All damages caused by lightning, whether fire results or not, are covered. IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 11 CHAPTER 1 FIRE TARIFF iii. Explosion / Implosion Excluding destruction or damage caused to the boilers (other than domestic boilers), economisers, or other vessels in which steam is generated, machinery or apparatus subject to centrifugal force by its own explosion / implosion. Definition An explosion is “a sudden violent burst with a loud sound”. Explosion causes damage by rupturing, shattering, cracking etc. of property. Explosion damage is evidenced by broken machinery, shattered glass, splintered timbers and widely scattered debris. This is known as ‘concussion damage’. Definition Implosion means bursting inward or collapse due to external pressure. The exclusion refers to destruction or damage to boilers (other than domestic boilers), economisers, etc. This risk can be covered under an engineering policy for boilers and pressure vessels. iv. Aircraft damage Destruction or damage caused by aircraft, other aerial or space devices and articles dropped there from, excluding that caused by pressure waves. The term ‘aerial or space devices’ would include, balloons, rockets, artificial satellites etc. The exclusion of pressure waves relates to damage, for example, rattling of window panes caused by aircraft flying low or supersonic boom creating thud due to shock waves causing fissures in multi-storey buildings by an aircraft flying at supersonic speed. v. Riot, strike, malicious and terrorism damage Direct visible physical loss, destruction or damage by external violent means caused to the property but excluding those caused by:  Total or partial cessation of work or the retarding or interruption or cessation of any process or operations or omissions of any kind. 12 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE FIRE TARIFF CHAPTER 1  Permanent or temporary dispossession resulting from confiscation, commandeering requisition or destruction by order of the government or any lawfully constituted authority.  Permanent or temporary dispossession of any building or plant or unit or machinery resulting from the unlawful occupation by any person of such building or plant or unit or machinery or prevention of access to the same.  Burglary, house breaking, theft, larceny or any attempt by any person in any malicious act. Terrorism damage exclusion warrantee The policy excludes loss, damage, cost or expense of whatsoever nature directly or indirectly caused by, resulting from or in connection with any act of terrorism regardless of any other cause or event contributing concurrently or in any other sequence to the loss. Definition An Act of Terrorism means (for the purpose of this exclusion,) an act or series of acts, including but not limited to the use of force, or violence and/or the threat thereof, of any person or group(s) of persons, whether acting alone or on behalf of or in connection with any organisation(s) or governments or unlawful associations, recognised under unlawful activities ( prevention) Amendment Act 2008 or any other related and applicable national or state legislation formulated to combat unlawful and terrorist activities in the nation for the time being in force, committed for political, religious, ideological or similar purposes including the intention to influence any government and / or to put the public or any section of the public in fear for such purposes. This exclusion also includes loss, damage, cost or expense of whatsoever nature directly or indirectly caused by, resulting from or in connection with any action taken in controlling, preventing, suppressing, or in any way related to the above. Terrorism Damage Inclusion Clause Insuring Clause: Subject otherwise to the terms, exclusions, provisions and conditions contained in the policy and in consideration of the payment by the insured to the Company of additional premium as stated in the schedule, it is hereby agreed and declared that notwithstanding anything stated in the “Terrorism Risk Exclusion” of this policy to the contrary, this policy is extended to cover physical loss or damage occurring during the period of this policy caused by an act of terrorism, subject to the exclusions, limits and excess described hereinafter. IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 13 CHAPTER 1 FIRE TARIFF For the purpose of this exclusion, an act of terrorism is defined as follows: Definition An Act of Terrorism means an act or series of acts, including but not limited to the use of force, or violence and/or the threat thereof, of any person or group(s) of persons, whether acting alone or on behalf of or in connection with any organisation(s) or governments or unlawful associations, recognised under unlawful activities (prevention) Amendment Act 2008 or any other related and applicable national or state legislation formulated to combat unlawful and terrorist activities in the nation for the time being in force, committed for political, religious, ideological or similar purposes including the intention to influence any government and / or to put the public or any section of the public in fear for such purposes. This cover also includes loss, damage, cost or expense of whatsoever nature directly or indirectly caused by, resulting from or in connection with any action taken in controlling, preventing, suppressing or minimising the consequences of an act of terrorism by the duly empowered Government or Military Authority. Provided that if the insured is eligible for indemnity under any government compensation plan or other similar scheme in respect of the damage described above, this policy shall being excess of any recovery due from any such plan or scheme. For the purpose of aforesaid inclusion clause, military authority means: Definition “Military Authority” means armed forces, paramilitary forces, police or any other authority constituted by the Government for maintaining law and order. vi. Storm, cyclone, typhoon, tempest, hurricane, tornado, flood and inundation The loss or destruction or damage caused by STFI is covered as per their popularly accepted meanings excluding these resulting from earthquake, volcanic eruptions, and other convulsions of nature”. Whenever earthquake risk is covered as an add on cover, the words “excluding these resulting from earthquake” should be deleted. 14 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE FIRE TARIFF CHAPTER 1 Definition Storm is defined as “some severe, if not violent, atmospheric disturbance such as unusually heavy rain, hail, wind, snow storms, or some combination of these. Cyclone, typhoon, etc. are examples of storms of greater intensity. Definition Flood is usually defined as “escape from its normal confines, of a body of water, due to a rise in its level, or to the breakdown of the barriers restraining it.” vii. Impact Damage Impact by direct contact by any rail / road vehicle or animal by direct contact not belonging to or owned by:  the insured or any occupier of the premises or  their employees while acting in the course of their employment Impact damage due to insured’s own Rail / Road vehicles and the like and articles dropped there from can be included as an “add on cover” by endorsement and at extra premium (see chapter 2). viii.Subsidence and landslide including rockslide Destruction or damage caused by subsidence of part of the site on which the property stands or landslide / rockslide excluding:  the normal cracking, settlement or bedding down of new structures  the settlement or movement of made-up ground  coastal or river erosion  defective design or workmanship or use of defective materials  demolition, construction, structural alterations or repair of any property or ground works or excavations ix. Bursting and / or overflowing or water tanks, apparatus and pipes x. Missile testing operations These operations are conducted by the Government of India. IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 15 CHAPTER 1 FIRE TARIFF xi. Leakage from automatic sprinkler installation Excluding destruction or damage caused by:  Repairs or alterations to the buildings or premises.  Repairs, removal or extension of the Sprinkler Installation.  Defects in construction known to the insured. A sprinkler installation is designed to automatically discharge water when a fire takes place. Damage caused by water is thereby payable as damage by fire. However, there may be accidental leakage from the installation, when there is no fire. This risk covers the damage caused thereby. xii. Bush Fire Excluding destruction or damage caused by forest fire. Bush fire is limited and localised compared to spread of forest fire and refers to, for example accidental burning of vegetation, grass etc., in and around the insured premises. Forest fire is catastrophic in nature and can be included as an “add-on” cover on payment of extra premium (See Chapter 2). b) General Exclusions There are thirteen exclusions under the policy: i. 5% of each and every claim resulting from the operation of Lightning / STFI / Subsidence & Landslide including Rockslide. (Minimum Rs.10,000/) and for loss due to other perils covered under the policy having Sum insured up to INR 10 cr per location (for business incepting from 1st April 2011). The excess is applicable per event per insured. This is called a ‘compulsory excess’ or compulsory ‘deductible franchise’. ii. Loss or damage caused by war, civil war and kindred perils. iii. Loss or damage directly or indirectly caused to the property insured by nuclear risks. iv. Loss or damage caused to the insured property by pollution or contamination excluding:  pollution or contamination which itself results from a peril hereby insured against  any peril hereby insured against which itself results from pollution or contamination 16 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE FIRE TARIFF CHAPTER 1 The exceptions (a) and (b) provide cover in respect of pollution or contamination. Example For example fire (an insured peril) may cause pollution damage to insured property or fire itself may result from pollution, for example through leakage of gas. v. Loss or damage (unless otherwise expressly stated in the policy) to  bullion or unset precious stones  curios or works of art for an amount exceeding Rs.10,000/-  manuscripts, plans, drawings, securities, obligations or documents of any kind  stamps, coins or paper money, cheques,  books of accounts, or other business books,  computer systems records,  explosives (Note: These properties may, however, be covered subject to special terms and conditions when expressly declared for coverage.) vi. Loss or damage to the stocks in cold storage premises caused by change of temperature. However, deterioration of stocks in cold storage premises due to failure of electric supply and /or fire damage to Cold Storage Machinery following damage due to an insured Fire Policy peril may be covered by endorsement. (This is dealt with later under “Add-on” covers – Chapter 2) vii. Loss or damage to  Any electrical machine, apparatus, fixture or fitting (excluding fans and electrical wiring in dwellings) arising from  Over-running, excessive pressure, short circuiting, arcing, self- heating or leakage of electricity, from whatever cause (lightning included). IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 17 CHAPTER 1 FIRE TARIFF This is known as “Electrical Risks” exclusion clause. These risks can be covered separately under Machinery Insurance Policy (Engineering insurance). It is to be noted that, damage to the electrical machine, etc. by specified electrical risks is only excluded, however, if the resulting fire is covered if it causes damage to other insured property due to spread of fire.. viii. Expenses necessarily incurred on (i) Architects, Surveyors and Consulting Engineers fees and (ii) Debris Removal by the insured following a loss, destruction or damage to the property insured by an insured peril in excess of 3% and 1% of the claim amount respectively. It is to be noted that a specified percentage of the claim amount is in-built in the policy. The following clauses are attached to the policy. Architects, Surveyors and Consulting Engineers Fees It is hereby declared and understood that the expenses incurred towards architects, surveyors and consulting engineers fees for plans, specification tenders, quantities and services in connection with the superintendence of the reinstatement of the Building, Machinery, Accessories and equipment insured under this policy up to 3% of the adjusted loss, but it is understood that this does not include any cost in connection with the preparation of the insured’s claim or preparation of estimate of loss in the event of damage by insured perils. Debris Removal “It is hereby declared and agreed that the expenses incurred up to 1% of the claim amount is covered on  Removal of debris from the premises of the insured  Dismantling or demolishing  Shoring or propping Note: Second and third point above are to be deleted when neither building nor machinery are covered". (Note: Fees and expenses in excess of 3% and 1% but up to a stipulated limit can be covered by extension of the policy. (This is dealt with under “Add- on” covers in the chapter 2) 18 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE FIRE TARIFF CHAPTER 1 ix. Loss of earnings, loss by delay, loss of market or other consequential or indirect loss or damage of any kind or description whatsoever. The fire policy covers only “material damage” to insured property caused by insured perils. This position is abundantly made clear by the exclusion. However, some of the consequential losses resulting from ‘material damage’ Example Loss of gross profit; standing charges and increased cost of working to return to normalcy within a stipulated indemnity period can be covered under a separate Consequential Loss (Fire) Policy. x. Loss or damage by spoilage resulting from the retardation or interruption or cessation of any process or operation caused by operation of any insured peril. (This is dealt with later under “Add-on” covers in the chapter 2.) xi. Loss by theft during or after the occurrence of any insured peril except as provided under riot, strike, malicious damage and terrorism damage cover xii. Loss or damage due to earthquake, volcanic eruption or other convulsions of nature. xiii. Loss or damage to property if removed to any building or place other that in which it is insured, except machinery and equipment temporarily removed for repairs, cleaning, renovation or other similar purpose for a period not exceeding 60 days. c) Conditions There are fifteen conditions in the policy and the salient features of these conditions are outlined below. i. This condition provides that the policy shall be voidable in the event of mis-representation, mis-description or non-disclosure of any material particulars. This is reiteration of the principle of utmost good faith, for the sake of emphasis. ii. All insurances under the policy cease after seven days from the date of fall of displacement of any building or part thereof. This does not apply if such fall or displacement is caused by the insured perils loss or damage which is covered by the policy. IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 19 CHAPTER 1 FIRE TARIFF However, if notice is given not later than seven days of such fall, the company may agree to continue, the insurance subject to revised terms and conditions and by endorsement of the policy. iii. This is known as the material alteration condition. Under any of the following circumstances the insurance ceases to attach as regards the property affected:  Changes in trade or manufacture or nature of occupation or other circumstances which increase the risk of loss or damage by insured perils.  Un-occupancy of the building for a period more than 30 days.  Transfer of insurable interest unless by will or operation of law. When the insured’s insurable interest ceases (e.g., sale of property), the insurance automatically ceases. However, two exceptions are made:  On the death of the insured, the policy vests in the legal heirs named in the will. A trustee or liquidator in bankruptcy proceedings acquires insurable interest and becomes the insured.  The insurance may be continued if the insured before the occurrence of any loss or damage, obtains sanction of the company through endorsement. iv. The insurance does not cover any loss or damage to property which, at the time of loss or damage, is insured by any marine policy. But the policy will cover only the excess beyond the amount payable under the marine policy. This is known as Marine clause. Marine cargo policies include cover in respect of fire and it is possible for fire and marine policies to overlap, for example, for the period during storage of goods in port premises. v. The insurance may be terminated at any time by the insured and premium is refunded at short period scale or by the company, on 15 days’ notice and premium for the unexpired term is refunded on pro-rata basis. vi. This condition is in two parts and is known as duty to insured clause.. First part The first part of the condition lays down the duties of the insured in the event of loss or damage and the procedure to be followed by him. The requirements are: 20 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE FIRE TARIFF CHAPTER 1 Immediate notification of the loss to the company Submission within 15 days of the loss or, within such extension as may be granted by the company of a written statement of the claim giving full particulars of the loss or damage and of the property affected and details of other insurances, if any. (Usually, the insurers supply a claim form for the purpose.) Submission of all reasonable information and proof in respect of the claim at the insured’s expense A declaration, on oath or in other legal form of the truth of the claim. (This is rarely insisted upon in practice.) The condition expressly provides that compliance with its terms is precedent to insurer’s liability. Although an independent loss assessor is appointed by the insurers to report on the cause and extent of loss, the provisions of this condition are still binding on the insured. Second part The second part of the condition is known as ‘limitation condition’. According to this condition the liability of the insurer for any loss is extinguished after the expiry of twelve months from the date of the loss, unless the claim is the subject of pending action or arbitration. Further, if liability for any claim is disclaimed by the insurer, and the insured has not filed a suit in a court of law, within 12 calendar months from the date of the disclaimer, then the claim is deemed to be abandoned and cannot be recovered thereafter. In other words, the claim becomes time barred. This condition provides necessary protection to the insurer against inordinate delay on the part of the insured in substantiating the claims. It is not possible for the insurer to keep its accounts open for an indefinite period. In the absence of this condition, it would be possible for the insured to reopen his claim after a considerable lapse of time when the insurer may have lost all traces of the evidence which led to its original rejection. vii. The condition gives right to the insurance company to enter the premises where loss has occurred, take possession of property and deal with it as may be necessary (e.g. salvaging) and sell such property for account of all concerned. This is known as the ‘right of entry’ condition. IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 21 CHAPTER 1 FIRE TARIFF The condition further provides that:  Exercise of these rights does not mean that liability for loss is admitted.  Benefit under the policy is forfeited if the insured does not Co-operate.  The insured has no right to abandon the property to the insurers whether taken possession of or not by them. The right of abandonment arises under a Marine Policy where the insured can abandon to the Insurers, property which is extensively damaged and claim a constructive total loss. This right is however denied under a fire policy (as otherwise it would cause a lot of problems for the insurers). This condition confers certain rights on the insurers in the event of a claim. These rights are necessary for the insurers to ascertain the cause and extent of loss or damage, to minimise the damage, and to protect the salvage. The condition enables the loss assessors to enter the premises to establish the cause and extent of loss and the salvage corps to protect the salvage and minimise the damage that may be caused in the process of extinguishment. The rights conferred by the condition are exercisable by the company at any time until:  Notice in writing is given by the insured that he makes no claim or  Such claim is finally determined or withdrawn. viii. This condition deals with fraud. According to this condition, all benefits under the policy shall be forfeited in the following circumstances :  The claim is fraudulent.  The claim is supported by a false declaration.  Fraudulent means are used by the insured or any one acting on his behalf.  Loss or damage is caused by the willful act of the insured or with his connivance. 22 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE FIRE TARIFF CHAPTER 1 These provisions merely reiterate the position under common law. Utmost good faith is an implied condition in an insurance contract and places upon the insured the duty to deal honestly with the insurer when a claim arises. Fraud will automatically avoid the policy, so also willful fire caused by the insured or with his connivance. However, for the sake of special emphasis, an express condition is incorporated in the policy. This is the ‘reinstatement or indemnity condition’. The operative clause provides that the company may pay the value of the property at the time of its destruction or the amount of damage or at its option reinstate or replace such property. This condition makes provisions relating to reinstatement or replacement to its pre fire condition in exercise of this option as follows:  Reinstatement shall not be exact or complete but shall be in a reasonably sufficient manner.  Expenditure is limited to the cost of reinstating the property to its pre-fire condition subject to the sum insured chosen.  It is the duty of the insured to furnish, at his expense, the insurer with all plans and such other particulars as may be required.  Any act done by the insurer with a view to reinstate is without prejudice to the final decision regarding reinstatement and in the manner prescribed above.  If due to municipal or other regulations in respect of building construction etc. the insurer is unable to reinstate, the liability is limited to such sum as would be sufficient to reinstate such property if the same could lawfully be reinstated to its former condition i.e., on indemnity basis. The condition is rarely invoked in practice. (The main object of inserting this condition is to have some protection against unreasonable or exaggerated claims. If the insured is not inclined to accept the offer of reinstatement, it may prove to be a factor in favour of the insurer in any subsequent litigation.) ix. This is the pro-rata average condition. If the property hereby insured shall, at the eruption of fire, or, at the commencement of damage by any other peril insured be collectively of greater value than the sum insured thereon, then the insured shall be considered as being his own insurer for the difference, and shall bear a rateable proportion of the loss accordingly. Every item, if more than one, of the policy shall be separately subject to this condition. IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 23 CHAPTER 1 FIRE TARIFF According to this condition if there is under insurance, that is, if the sum insured under the policy is less than the value of the property on the date of loss the amount of loss payable will be proportionately reduced. The object of the condition is to penalise under insurance by a corresponding under payment of claim. Example The application of the condition may be illustrated with an example. Sum insured Rs.30,000/- Value of property Rs.40,000/- Loss Rs.16,000/- Amount of claim payable (Rs.16,000 x Rs.30,000 / Rs.40,000) Rs.12,000 The second part of the condition provides that if the fire policy covers more than one item of property each item of property will be separately subject to average. This may be illustrated as follows: Sum insured Value Loss Amount Payable Rs. Rs. Rs. Rs. Building 1,00,000/- 1,00,000/- - - Machinery 3,00,000/- 2,00,000/- - - Stocks 5,00,000/- 6,00,000/- 60,000/- 50,000/- Total 9,00,000/- 9,00,000/- In the above example the total sum insured corresponds with the total value but the stocks are under insured. Hence this item is separately subject to average and the amount of loss is proportionately reduced. Fire insurance rates are determined on the assumption that property is insured for its full value. If the amount insured is less than the full value, the insured pays premium, that is, less than the due contribution to the common premium fund. The condition ensures that the sum insured is adequately fixed by the insured. x. This is usual contribution condition. If there is more than one policy covering the same property by similar peril, in the event of loss, the company will be liable to pay only the rateable proportion of the loss. Rateable proportion of the policy may be defined as that proportion of the loss as the sum insured under the policy bears to the total sum insured under all the policies. 24 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE FIRE TARIFF CHAPTER 1 xi. This is the subrogation condition. Insured’s rights and remedies to obtain relief or indemnity from other parties are subrogated to the insurers, who are entitled to these rights even before they indemnify the loss. The condition also provides that the insured shall, at the expense of the company, render assistance to the company for enforcing these rights and remedies against the other parties responsible for the loss. xii. The arbitration condition provides as follows:  Any dispute or difference as to the quantum to be paid under this policy shall, independently of all other questions, be referred to arbitration.  No dispute or difference shall be referred to arbitration, if the company has disputed or not accepted liability under the policy.  A sole arbitrator is to be appointed in writing by the parties.  If the parties cannot agree upon a single arbitrator within 30 days of any party invoking arbitration the same shall be referred to a panel of three arbitrators, one to be appointed by each of the parties and the third arbitrator to be appointed by such two arbitrators.  Arbitration shall be conducted under the provisions of the Arbitration and Conciliation Act, 1996.  The award by arbitrator(s) shall be a condition precedent to any right of action or suit upon the policy.  The object of this condition is to ensure that disputes are settled quickly.  Arbitration procedure is less expensive than Litigation. Arbitration is also a private process. Hence, it avoids undue publicity to the insurers of an adverse nature. xiii. Every notice or other communication to the company required by the conditions must be written or printed. xiv. The full sum insured has to be maintained throughout the currency of the policy. Upon the settlement of loss pro-rata premium from the date of loss to the date of expiry shall be payable by the insured. The extra premium shall be deducted from the net claim payable. IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 25 CHAPTER 1 FIRE TARIFF The continuous cover to the full extent will be available not withstanding any previous loss for which the company may have paid and irrespective of the fact whether the additional premium has been actually paid or not following such loss. In case the insured immediately on occurrence of the loss exercises his option not to reinstate the sum insured, then the sum insured shall stand reduced by the amount of the loss. Test Yourself 2 Damage to the stocks in cold storage premises is: I Generally always excluded from fire policy II Generally included in fire policy III Generally excluded in fire policy but may be covered by endorsement under "add-ons" IV Is included in fire policy only if the cold storge has fire-privention facilities 26 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE SUMMARY CHAPTER 1 Summary a) The subject matter of fire insurance may be any kind of moveable and immovable property having pecuniary value. b) Fire Insurance contracts are governed by the general law of contract as embodied in the Indian Contract Act, 1872. c) Fire insurance is governed by basic principles evolved under common law. These include: Utmost good faith, Principle of Indemnity, Insurable Interest, Proximate Cause, Contribution and Subrogation. d) The sum insured is to be fixed by the insured. e) The sum insured should represent the actual value of the property insured. If there is over-insurance, there is no benefit to the insured; if there is under-insurance, the claim amount will be proportionately reduced by applying pro-rata average. f) Fire insurance business was governed by the All India Fire Tariff. The Tariff Advisory Committee have laid down rules, regulations, rates, advantages, terms and conditions for fire insurance business in India under the provisions of Part IIB of the Insurance Act, 1938. g) The fire policy form consists of three main parts: Operative clause, General exclusions and General conditions. h) Perils covered generally include: fire, lightning, aircraft damage, explosions, implosions, aircraft damage, riots, strike, terrorism damage, storm, cyclones, hurricanes, tornados, bush fire, leakage, bush fire, etc. i) There are generally thirteen exclusions prescribed in a fire policy. j) There are generally fifteen conditions prescribed in a fire policy. IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 27 CHAPTER 1 SUMMARY Key Terms a) Fire insurance business b) Utmost good faith c) Subrogation d) Contribution e) Insurable interest f) Principle of indemnity g) Proximate cause h) Market value i) Reinstatement value j) Fire Tariff k) Operative Clause l) Terrorism damage m) Indemnity condition n) Pro-rata average condition o) Arbitration condition 28 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE PRACTICE QUESTIONS AND ANSWERS CHAPTER 1 Answers to Test Yourself Answer 1 The correct option is IV. The principle of subrogation and principle of contribution are corrolories to principle of indemnity Answer 2 The correct option is III. Damage to the stocks in cold storage premises is generally excluded but may be covered by endorsement under "add-ons". Self-Examination Questions Question 1 Which one of the following principle is a corollary of the principle of indemnity? I Principle of subrogation II Principle of insurable interest III Principle of utmost good faith IV Principle of proximate cause Question 2 Which principle of insurance gives legal validity to insurance contracts? I Principle of contribution II Principle of insurable interest III Principle of utmost good faith IV Principle of proximate cause Question 3 Mr. X has a value of property of Rs 1,00,000. Sum insured is Rs. 75,000. Loss incurred due to fire is Rs. 35,000. Determine the amount of claim payable under a fire insurance contract. I Rs. 26,250 II Rs. 35,000 III Rs. 46,667 IV Rs. 75,000 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 29 CHAPTER 1 PRACTICE QUESTIONS AND ANSWERS Question 4 The sum insured in a fire insurance contract can be fixed on: I Cost of asset II Reinstatement value III Nominal value IV Rateable value Answers to Self-Examination Questions Answer 1 The correct option is I. The principle of subrogation is a corollary of the principle of indemnity. If the loss suffered by the insured is recoverable from third parties who are responsible for the loss, the insured’s rights of recovery are transferred or subrogated to the insurers when they indemnify the loss. Answer 2 The correct option is II. The requirement of insurable interest gives legal validity to insurance contracts and distinguishes them from mere wagers. Insurable interest may be defined as the legal right to insure which right arises out of a pecuniary relationship between the insured and the subject matter of insurance whereby destruction or damage to the latter involves the insured in financial loss Answer 3 The correct option is I. According to the pro-rata average condition, Rs. 75,000 / Rs. 100,000 x Rs. 35,000 = Rs. 26,250. Answer 4 The correct option is II. The sum insured can be fixed on reinstatement value or market value, or agreed value. 30 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE