2.) aR at ae INSURANCE INSTITUTE OF INDIA IC - 57 FIRE AND CONSEQUENTIAL LOSS INSURANCEIC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE ACKNOWLEDGEMENT , ” This course is based on revised syllabus prepared with assistance of: Vv. P. Sharma Sameer Saxena Govind Johri We also acknowledge Get Through Guides, Pune for their contribution in preparing the study material. ara aera viy{| INSURANCE INSTITUTE OF INDIA £4 G- Block, Plot No. C-46, Bandra Kurla Complex, Bandra (E), ‘Mumbai - 400 051. OF INDIAFIRE AND CONSEQUENTIAL LOSS INSURANCE IC-57 Revised Edition: 2015 Reprinting - March 2016 - 1000 Copies Reprinting - May 2016 - 2000 Copies ALL RIGHTS RESERVED This course is the copyright of the insurance institute of india, Mumbai. In no circumstances may any part of the course be reproduced. The Course is purely meant for the purpose of study of the subject by students appearing for the examinations of insurnce institute of India and is based on prevailing best industry practices..It is not intended to give interpretations or solutions in case of disputes or matters involving legal arguments. This is only an indicative study material. Please note that the questions in the examination shall not be confined to this study material. Published by: P. Vengopal, Secretary-General, Insurance Institute of India, G- Block, Plot C-46, Bandra Kurla Complex, Bandra (E) Mumbai - 400 054 ‘and Printed at Eastern Printing Press, Fort, Mumbai - 400 001.PREFACE This course is designed for the use of candidates for the Associate ship Examination of the Insurance Institute of India. Specifically, the course deals with coverage under basic fire policies and extensions thereof. Fire hazards and loss prevention, Risk Inspection Report, System of rating and underwriting, drafting of policies and endorsements, legal and procedural aspects of claims processing and specialized policies for Petrochemical risks and large Industrial risks. The course also includes some inputs on overseas fire insurance practice. The course also deals with Consequential loss (Fire) insurance in terms of basic coverage, extensions of coverage. Variations of basic coverage e.g. output policy, revenue policy, gross fees policy and finally claims processing. Although the course covers the syllabus prescribed for the examination, it is desirable that candidates should read additional material such as text books, office manuals and operating instructions and insurance magazines and law journals etc, This will enrich their knowledge of the subject. The candidates are also recommended to collect and study specimen forms used in offices (e.g. Proposal, Policy, Claim form and other forms relevant to the subject). This will provide a practical basis for their studies. The course should also prove useful to the general reader who desires to have knowledge of the subject covered.CONTENTS Chapter no. Title Page no. 1 Basic Principles and The Fire Policy 1 | Z Add On Covers and Special Policies 31 3 Fire Hazards and Fire Prevention 63 4 Erstwhile Tariff - Rules and Rating n 5 Documents 113 6 Underwriting 135 7 Claims - Legal Aspects 169 8 Claims - Procedural Aspects 199 9 Consequential Loss Insurance - | 223 10 Consequential Loss Insurance - Il 251 "1 specialised Policies and Overseas 281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, i> vy ad ae — ee 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CHAPTER 1 BASIC PRINCIPLES AND THE FIRE INSURANCE POLICY. [ A. Basic principles and the Fire Insurance Policy 4. Introduction ‘Bire-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 fisksaré classified as SS @ social perils, e.g. riot, strike, etc., $7ratural perils e.g. storm, flood, etc., and miscellaneous types of perils, e.g. aircraft damage, impact damage by road / rail vehicle, etc. Impportant 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 fi 6S Ter e re other-specified perils, during a stated period, = "~~ eee |C-57 FIRE AND CONSEQUENTIAL LOSS INSURANCEBASIC PRINCIPLES AND THE FIRE {NSURANCE POLICY CHAPTER 1 Fire Insurance contracts are governed by the general law of contract as embodied in the Indian Contract Act, 1872, and-a Tire insurance contract must Rave the following essential ingredients in order to it enforceable at law: i. Offer and acceptance fi. Consideration fii, 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 | A" GN © e FnScrave Ae PRS Seiten Con Mer dct 182 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 isclosure of material facts, under common law, ceases when— the nkcact is-concuded However, condition Sof Me re policy. ‘provides that insured should otice to insurer if there are any material aerstons during the currency of the policy. Hence the du ‘of disclosure con throughout the currency of the policy. ae 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 goo faith becomes a contractual duty and. Statements in the proposal Toim ate converted from mere representations ‘into warranties and have to be literally true. — pe Ne Tene ee eee a Where ‘he oremises are surveyed by the {nsuters, they are deemed to have Acguited the materi formation concerning the risk and the insurer cannot fater penalise the insured for. noi ire or misrepresentation unless he _is able to establish that the insured deliberately withheld any from, le 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 Sclowing 3 toss the insured is expected to salvage as much of the property b) Insurable interest . “The requirement of insurable interest gives legal validity to insurance contracts and distinguishes them from mere wagers (nsurable_i est may be defined as the legal right to insure which arises out of a pecuniary ‘alate p alyeet These ane THe abfecEnattr—o inane eereby destruction or damage to the latter involves the insured in financial oss. Absolute legal ownership affords a clear example of insurable interest. A number of other persons may also have insurable interest. ~ 1C-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 taking the policy, continue throughout its currency and should exist at the time of a toss. Fire insurance policies are personal contracts. Hence, if the property is Sold or transfer y is not transterred automatically. Transferring the“ policy in >w owner's name has to be agreed to, accepted and endorsed on the policy (see pear indition 3 of the fire policy). ” lemnity - that is, their object is to ie 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; ofit or undue benefit is allowed The indemnity is subject to the sum insured and other terms of the poticy. The sum insured can be fixed on reinstatement or market value, or agreed value. Let us understand these terms below: 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 fing, after deducting from the. cost, depreciation based on age, usage, maint Similarly, for plant and machinery, market value is arrived at by deducting suitable depreciation for age, usage, wear and tear, etc., from the current Teplacement costs. In all these cases, sepreciation refers to actual intrinsic physical depreciation and not the depreciation fates_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. 1C-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE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 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—insucance 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 depreciatio 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 tesorted to inthe case of obsolete machinery or eritage buildings where depreciation. is not a_material’ factor ~and is not possible, “ availability of similar type of pr 1C-57 FIRE AND CONSEQUENTIAL LOSS INSURANCEBASIC PRINCIPLES IND 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 househald_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, 1.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, (.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. ihe ee 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. ms —— See > 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). (C-57 FIRE AND CONSEQUENTIAL LOSS INSURANCEd) Subrogation The principle of subrogation is a corollary of the principle of indemnity. If the loss-suffered-by the insured is récoverable 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 inciple of contribution which is also a corollary of the principle. of_ y provides that if the same property is insured under moré than one ; 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? 1 Principle of proximate cause NV Principle of utmost good faith Il Principle of insurable interest WV. Principle of indemnity B. Fire Tariff 1. Introduction Fie surance busines was governed by the All india Fire Tarif (AIFT. The Ta Vi have [aid down rules, regulations, rates, advantages, terms and conditions for fire insurance business eee ey torent 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 1* January, 2007. It was also co ‘acco reguatinns her thar hase reat Me oe ating to—rAting’ viz. eae ee etc. “ Clauses, 2d until decided ot wise, 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 T General rules and regulations Section IT___| Standard fire and special perils policy Section II | Dwellings, offices, hotels, shops etc. Section IV__| industrial / manufacturing risks SectionV | Utilities located outside the industrial / manufacturing risks (stand alones) Section VI | Storage risks outside the compound of industrial 7 manufacturing risks Section ViI__| Tank farms / gas holders outside the compound of industrial 7 manufacturing risks Section Vill__| Add-on covers ‘Annexure | Specimen copy of clauses [Important i. The rates and percentages provided in the Study Text are for illustrative purposes only. ji, 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 his clause consists of three parts: preamble, limitation of the sum “insured and perils covered ~~ 1C-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 9a 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. J Perils covered The perils covered are now dealt with as hereunder: i. Fire [Definition The term ‘fire’, for insurance purposes, means ans actual ignition or burning, under accidental or fortuitous circumstances, so far as the Insured is concern Excluding destruction or damage caused to the property insured, by: [HO ; © SPQ its own fermentation, natural heating or spontaneous combustion iq ¥ 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 b it wut rather an inevit: loss under certain circumstances, His Example Spontaneous combustion results from internal heating which A takes certain substances (e.g., hay, coal) when stocked or stored in bulky PSC 70 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 (7 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. C-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE Miti, Explosion / Implosion Decluding destruction or damage caused to the boilers (other than domestic rsh 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’ i ing etc. of property. \losion causes damage by rupturing, shattering, cracking etc. of plosion damage is evidenced by broken machinery, shattered glass, Definition Implosion means bursting inward or collapse due to external pressure 12 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. le id include, balloons, rockets, The term ‘aerial or space devices’ woul artificial satellites etc. The exclusion of pressure waves relates window panes caused by aircraft flying | due to shock waves causing fissures in flying at supersonic speed, to damage, for example, rattling of low or supersonic boom creating thud multi-storey buildings by an aircraft Riot, strike, malicious and terrorism damage Direct visible physical loss, destruction or damage by ph eietetrra. Me external violent means caused to the property But éxcluding those caused by: eee Y Total or partial cessation of work or ‘ the retarding or interruption or cessation of any process or operations o Fr omissions of any kind, 'C-57 FIRE AND CONSEQUENTIAL LOSS INSURANCECOR essai BWA sey wet eg a a oe PineSTA, ee p telth wand § tate yecian yt CHAPTER 1 ae? ¥ 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. i - Sf OS ud ¥ Burglary, house breaking, theft, larceny or any attempt by any person in any malicious act. AF yal rl ge gn! o 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. re 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 consideratian of the payment by the insured tothe Company of adeitiona remium as tated inthe Schein, “hereby agceed and declared that notwithstanding anything stated in the. “Terrorism. Risk. Exclusiof?”~of_ this.-policy- te-thecantrary, this policy ix 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. aa 16-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 3cunpren 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 untawful 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 ihed above Ts pay 4 policy shall being excess of any recovery due from any _ such plan or scheme. soi For the purpose of aforesaid inclusion clause, military authority means: [Definition “Military Authority” means armed forces, paramilitary forces, poli other authority constituted by the Governmer is fand onder. nt for maintaining law and order. vi. Storm, cyclone, typhoon, tempest, hurri Storm, pest, hurricane, tornado, flood and y STFI is covered as per their resulting from earthquake, Whenever earthquake the words “excluding these resulting from earthquake” should be deleted.{FIRE TARIEF charren 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 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 v their employees while acting in the course of their employment Impact damage due to insured’s own Rail / Road 1 vehicles and the like and articles. dropped there from can_be included a av 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 of 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 AMAR WY 4x, Bursting and / or overflowing or water tanks, apparatus and pipes X. Missile testing operations ‘These operations are conducted by the Government of India. 1C357 FIRE AND CONSEQUENTIAL LOSS INSURANCE 1516 xd. Leakage from automatic sprinkler installation Excluding destruction or damage caused by: Y Repairs or alterations to the buildings or premises. | ¥ Repairs, removal or extension of the Sprinkler Installation. Y 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. adi. Bush Fire Excluding destruction-or damage caused by forest fire. Bush fire-is-timited_and_tocalised compared. to spread of forest fire and réfers 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 ai n” cover on payment.of extra premium (See Chapter b) General Exclusions There are thirteen exclusions under the policy: —SS_——or ‘Bisa each and every claim resulting from the operation of Lightning / SFI 7 Subsigence te tandslide including Rockstide. (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’. Loss or damage caused by war, civil war and kindred perils. iif. Loss or damage directly or indirectly caused to the property insured by nuclear risks. iv. Loss or damage caused to the insured property by polluti contamination excluding: — ¥ pollution or contamination which itself results fror ‘insured against Mm a peril hereby Y any peril hereby insured against which itself results ie any peril hart sults from pollution or IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCEFIRE TARIFF ae The exceptions (a) and (b) provide cover in respect of pollution or pi ti 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 Y 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, S888 explosives (Note: These properties may, however, be covered subject to spé 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 7or fire damage to Colt Storage Machinery following damage due to an insured Fire Policy peril may be covered idorsement. (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 Y Over-running, excessive pressure, short circuiting, arcing, self- heating or leakage of electricity, from whatever cause (lightning included). {C-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 7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. . - Expenses necessarily incurred on (i) Architects, Surveyors and Consulting Engineers fees and (fi) 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 ip-cennection with the superintendence of the-reinstatement_of_the_Buildiag, Machinery, ; and equipment insured under this policy up to 3% of the adjusted toss, but itis understood that this-dees-nat 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. — —ae 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 « on” covers in the chapter 2) f ame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 olicy covers only “material damage” ti roperty caused insured perils. This position 1 abundantly made clear by the exclusion. However, some Of the consequential_losses resultin “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 da c) Conditions There are fifteen conditions in the policy and the salient features of these , conditions are outlined below. aS gay ah a i. This condition provides that the policy shall be yoidablé 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, days.fcam the date of fall of displacement of any building or oor. This ~This-right is Satey a otherwise ‘it would ee — 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 Y Such claim is finally determined or withdrawn, Vili. This condition deals with fraud. According to this condition, all benefits under the policy shall be forfeited in the following circumstances : Y The claim is fraudulent. The claim is supported by a false declaration. Fraudulent means are used by the insured or Fraud y red or any one acting on his Loss or damage is caused by the willful act of th i Pe ie le insured or with his \FIRE TARIFE 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 Valué of the property at the time of its destruction or mount 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: ete but shall be in a ‘reasonably sufficient manner. Y Reinstatement shall not be. exact. ¥ Expenditure is limited to the cost of reinstating the property to its pre-fire condition subject to the sum insured chosen. Y 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. v 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. Y Jf due to municipal or other regulations in respect of building construction jetc. the insurer is_unable to reinstate, the liability is limited to such sum as Would be sufficient state such property ifthe same fould lawfully be réinstated to its former condition i.e., on indemnity basis aan orvinder 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 nat inclined to__ accept the offer of reinstatement, it may prove to be a factor in favour of “the insurer in any subsequent litigation.) —— - 2 Se eee 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. (C-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 23CHAPTER 4 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. 30,0007- Value of property Rs.40,000/- Loss Rs.16,000/- “Amount of claim payable (Rs.16,000 x Rs.30,000 7 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: Suminsured [Val Loss Amount Payable Rs. Rs. Rs. | Rs. Building 7,00,0007- | 1,00,0007- =| - 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 7 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 ll other questions, be referred to arbitration, Y No dispute or difference shall be referred to arbitration, if the company has disputed or not accepted liability under the policy. Y Asole arbitrator is to be appointed in writing by the parties. Y If the parties cannot agree upon a single arbitrator within 30 days of any patty 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. Y Arbitration shall be conducted under the provisions of the Arbitration ‘and Conciliation Act, 1996. Y The award by arbitrator(s) shall be.a condition precedent to any right _ suit upon the policy. = Y 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. xiif. 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. 1C-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE a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: | Generally always excluded from fire policy Il Generally included in fire policy I 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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 embodied in the Indic in Contract ‘Act, ne ¢) 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. Me \o IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE ia) Fire insurance business b) Utmost good faith ¢) Subrogation 4) Contribution e) Insurable interest f) Principle of indemnity g) Proximate cause h) Market value i) Reinstatement value j) Fire Tariff k) Operative Clause ) Terrorism damage m) Indemnity condition n) Pro-rata average condition 0) Arbitration condition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 Ill. 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? | Principle of subrogation Principle of insurable interest I Principle of utmost good faith IV Principle of proximate cause Question 2 Which principle of insurance gives legal validity to insurance contracts? | Principle of contribution Jk Principle of insurable interest Ill 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. 1 Rs, 26,250 HRs, 35,000 I Rs, 46,667 IV. Rs, 75,000 1C-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 29CHAPTER t PRACTICE QUESTIONS AND ANSWERS Question 4 ‘The sum insured in a fire insurance contract can be fixed on: 1 Cost of asset Ml Reinstatement value Hl Nominal value WV Rateable value [Answers to Self-Examination Questions Answer 1 The correct option is |. 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 |. 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 Il. ‘The sum insured can be fixed on reinstate fement value or market value, or agreed value,CHAPTER 2 ADD ON COVERS AND SPECIAL POLICIES [Chapter Introduction Insurance companies offer various ‘add on’ covers along with fire insurance on payment of additional premium. These add on covers are granted by attachment of endorsements. These extensions relate to additional perils or additional coverage. Also there are various different clauses present for special purposes in fire insurance. In this chapter we will examine these add on covers and various clauses present in fire insurance policies. We will also study about Declaration Policies and Floater Policies. Towards the end of the chapter we will study about some of the clauses which are present for special purposes in fire insurance. Learning Outcomes ‘Add on covers Various Clauses Declaration Policies Floater Policies Special Clauses mone >CHAPTER 2 ADD ON COVERS ESatkovers ‘Add on covers are extensions of the fire policy on payment of additional premium and granted by attachment of endorsements. These extensions relate to additional perils (earlier known as special perils) or additional coverages. The sum insured of add on peril is kept identical to sum insured of the policy. Diagram 4: Add on covers 32 C-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE‘ADD ON COVERS - _ - CHAPTER 2 1. Spontaneous Combustion (by Fire Only) ‘The operative clause of the fire policy provides cover in_res excludes damage caused t Natural heating or spontaneo ct of fire but fermentation, , me ‘dts ‘omibustion”. (See chapter 1) The extension endorsement reads as follows: In consideration of the payment by the Insured to the Company of additional Premium of Rs... the company agrees, notwithstanding what is stated in the policy to the contrary that the insurance by (items) of this policy shall extend to include toss or ‘damage by fire only’ of or to the property insured caused by its ‘own fermentation, natural heating or spantaneous combustion. The expression “by fire only” in the endorsement-cannot-be omitted under any circumstance. Thus, the additional cover provided is only in respect of only fire damage, as a result of spontaneous combustion. The classification of materials is based on severity of spontaneous combustion properties, placed under four categories as given below: Category Rate per mile !-Low or non-existent 0.25 T-Moderate 0.50 Uil-Variable 0.75 IV-High 7.00 The tariff provides a detailed list of commodities. For purpose of illustration some examples are provided below. {Example Category | Betel Nuts Cardamom — Castor Oi Chillies Coconut Of Clean Cotton (Loose and 7 or in bales including clean Cotton Waste) Cotton Seed Copra, Copra Seed, Copra Meal Groundnut Oi Grains and / or seeds Hides Groundnut (Shelled) Jute in bales and / or loose | Matches [Petroleum Products ‘Saw Dust Bamboo Stocks Tobacco-Loose and / or in bags Beedi Leaves and Beedies__| Sugar Black Pepper 1C-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 33aera ‘ADD ON COVERS Category 1! Cotton Seed de-olled cake | Cotton Seed Oil Foam Rubber Goods Groundnut (de-oiled Caked) Hay and Grass Lubricants excluding Petroleum Products Karadi oil Tarpaulin Oil Cake-Loose and 7 or in | Soyabean Oil bags Cardboards Waste Paper Copra Cake Category Ill ‘Gunnies or Bardan Fire Wood Paints and Varnish | Oily Cotton | excluding Synthetic Enamel Coaltar Rags Dyes and / or Chemicals Category IV ‘Aifalfa Meat Codliver OF ‘Corn Meal Feeds Empire Cloth Fish Meal. Fish Oil Fish Manure Fish Scrap Lard Oil (Commercial or | Linseed Oil Animal Oils) Nitro Cellulose Lacquers Oiled Clothing Oiled Fabrics Oiled Rags Oiled Silk Groundnut (Red Skin) Synthetic Enamels Tunginut Meals Varnished Fabrics Waste of all kinds (Except wool and paper waste) including Oily and / or greasy waste. ees 2. Earthquake (Fire and Shock) The cover is available for Earthquake Fire Only or Earthquake (Fire and Shock both). Earthquake cover shall be granted only if the entire property is in one complex/ compound / extension is identical to the sum insured against the risk covered under main policy except for the value of the plinths an buildings, —- == 7 34 1C-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE‘ADD ON COVERS CHAPTER 2 The extension endorsement reads as follows: “In consideration of an additional premium of Rs...... it is hereby agreed and declared that this Insurance is extended to cover loss or damage (including loss or damage by fire) to any of the property Insured by this policy occasioned by or through or in consequence of earthquake including Land slide / Rock stide resulting there from, but excluding flood or overflow of the sea, lakes, reservoirs and rivers caused by Earthquake except when STFI cover is opted out. Provided always that all the conditions of this policy shall apply (except in so far as they may be hereby expressly varied) and that any reference therein to loss or damage by fire shall be deemed to apply also to loss or damage directly caused by any of the perils which this insurance extends to include by virtue of this endorsement.” Note 1: Earth quake clause does not cover losses caused by STFI perils and vice versa. Note 2: The Earthquake (Fire and Shock) cover in conjunction with STFI is essential to cover Tsunami damages. If either of the two perils are not simultaneously covered Tsunami risk is not covered. a) Special Conditions i. Excess Clause Each and every claim under this add on cover is subject to a deductible of % of the net claim amount. ii. Onus of proof clause In the event of the Insured making any claim for loss or damage under this policy he must (if so required by thé company) prove that the loss or damage was occasioned by or through or in consequence of earthquake. The provisions of the extension are: ¥ Cove rage applies to both concussion or shock damage and fire damage. ¥ Coverage also applies to flood or overflow of the sea, lakes, reservoirs and rivers caused by earthquake, but not if storm, tempest, flood and inundation perils are deleted from the fire policy. ¥ All the conditions of the fire policy apply to this extension (except in so far as they may be expressly varied in the extension clause.) TC-S7 FIRE AND CONSEQUENTIAL LOSS INSURANCE 35CHAPTER 2 ADD ON COVE ¥ Each and every claim is subject to a deductible of 5% of the net claim amount. Y Onus of proof of loss is on the insured (if so required by the company). b) Rates of Premium are charged according to location SFSP basic rate: First the applicable SFSP (Standard Fire & Special Perils) basic rate for the risk is to be identified from the erstwhile. tariff. fi. FLEXA (Fire, Lightning, Explosion, Aircraft) Tariff rate: From this SSP |) basic-rate STF deletion discounts as given in the tariff and amended as per the discussions (for Residential and non industrial 0.15 per mille, efindustrat 0.25 per mille and for stock in open a rate of 0.25 per mille) is yb tobe reduced. This would give the ‘FLEXA Tariff rate’. - —— iii. Detariffed FLEXA rate: Detariffed FLEXA rate is arrived at by applying loading/discount on this FLEXA Tariff rate. ee iv. Rate applicable from 01-03-2012: To the De tariff FLEXA rate, agreed Min STEL rate as per occupancy and EQ rate as per the EQ Zone-is to be ) added back. The rate thus arrived is to be charged for the risks incepting after 1st of March 2012. ieee ~ ©) Earthquake rates to be charged For Earthquake, the rates have been adopted zone wise and Industrial and Non Industrial category wise which is as under. The Zones are classified as per the current zones in the erstwhile tariff. Zone — Non-industrial: Dwellings, Hotels, Shops as per Section Ill of ET, Industrial: Including Standalone storage, outside | the manufacturing Units, Utilities outside manufacturing units (All Sections except Ill of ET) | 0.05| 0.1 0.25 0.05 | 0.05| 0.05} 0.05 | 0.5 36 |C-57 FIRE AND, CONSEQUENTIAL LOSS INSURANCE