Fire insurance is an essential safeguard for businesses of all sizes and industries. In this blog post, we will dive into the details of how businesses can protect themselves with a fire insurance policy- from what it covers, to selecting the right policy for your specific needs.
What is Fire Insurance?
Fire insurance is a type of property insurance that covers losses caused by an accidental fire. Though most policies include some fire protection, business owners may want to purchase additional coverage to protect them from possible events where they may lose their property to a fire. The cost of replacing, repairing, or reconstructing property above the property insurance policy limit can be covered by an additional fire insurance policy. However, most fire insurance policies include general exclusions, such as war and war-like situations, pollution or contamination, wilfull or intentional damage, and so on.
In the event of a fire, property owners should document the property and its contents to simplify the assessment of loss or damage. The limit of coverage depends on the cause of the fire. Damages are reimbursed based on the replacement cost or actual cash value (ACV).
The full form of RSMD is (Riots, Strikes, and Malicious Damage) and it refers to a variety of risks that fire insurance can cover. The STFI is the combined event of storms, typhoons, cyclones, tempests, tornadoes, hurricanes, floods, and inundation that is normally covered under fire insurance policies.
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Why is fire insurance important?
When a business suffers fire damage, the costs can be astronomical. Not only is there the cost of repairs or replacement of the damaged property, but there is also the potential for lost revenue if the business has to shut down for an extended period. Fire insurance can help cover these costs and get the business up and running as quickly as possible.
And that’s the reason, the awareness around fire insurance has increased in India. Globally, the global fire insurance market achieved a valuation of US$ 69.0 billion in 2022. Looking ahead, researchers anticipate that the market will expand to US$ 106.8 billion by 2028, showcasing a compounded annual growth rate (CAGR) of 7.24% over the period from 2023 to 2028. Talking about India, fire insurance has recorded a positive growth of 7.1% in FY 22, as suggested by Invest India.
The benefits of fire insurance can be listed as follows-
- It provides protection against any loss or damage caused by any movable or immovable object that catches fire and explodes.
- It covers property damage caused by a fire, such as damage to furnishings, office buildings, machinery, stock, and so on.
- Aside from fire perils, it may cover damages caused by any natural calamity, explosion, water tank bursting, and so on.
Who can buy fire insurance?
If you possess one or more of the following, you can apply for fire insurance –
- Firm or organisation
- Shops or godown
- Medical clinics, hotels, lodging service
- Building, furniture, or household items
- Finance & research institutions, banks
- Industrial or manufacturing firms
Insurable Interest In Fire Insurance
The concept of insurable interest is a crucial element in insurance that forms the basis for the legality of any insurance agreement. It asserts that, in order for an insurance policy to be binding, the policyholder must possess a genuine financial stake in the item or situation covered by the policy. Put simply, individuals purchasing insurance should face potential financial harm or disadvantage if the insured event takes place. Absent this monetary interest, an insurance contract is viewed as speculative and usually cannot be enforced. There are both legal and moral reasons for upholding the principle of insurable interest. Legally, it ensures that insurance contracts are not used as a means of speculative investment. Morally, it upholds the principle that insurance is supposed to provide protection against financial loss rather than a means of profiting from someone else's hardship.
As a policyholder, you must hold a genuine financial interest in the property or asset you are insuring against fire risks. It is through this financial interest that insurance contracts are based on real risks and responsibilities, rather than on speculative gains. If there is no such stake or interest, the insurance contract would have no valid basis and could be misused.
Types of Fire insurance policy
Different types of fire insurance policies are designed to cater to the unique needs of businesses. Some of them are discussed below-
- Standard Fire and Allied Perils Policy
Under the “Standard Fire and Allied Perils Policy”, also known as SFSP, the following hazards are covered:
- Fire
- Lightning
- Implosion/Explosion
- Damage to aircraft
- Strike, riot, and malicious damage
- Storms, typhoons, cyclones, tempests, tornadoes, floods, hurricanes, and inundations
- Impact damage
- Landslide and subsidence
- Tanks, apparatus, and pipes burst or overflow.
- Testing operation of missiles
- Automatic Sprinkler Installations leakage
- Fire spreading out of the bushes.
Additional covers can be inducted into the SFSP policy by endorsement and by paying additional premiums.
B. Special Policies
- Floater Policy in Fire Insurance
This policy is only issued for stocks stored in warehouses/godowns at various locations but belonging to the policyholder. Stocks in godowns where there is a frequent inter-godown movement of stock, and where it is not possible to record every movement of stock in and out of godowns, are covered by this policy. It is possible to obtain a floater policy in fire insurance that covers one sum insured over all the godowns in a company.
2. Declaration Policy
When there are frequent fluctuations in stock values/stocks, this type of policy is useful to avoid underinsuring (ensuring lower values). As per the agreement, stock values are to be declared periodically, e.g., monthly, and the premium is calculated based on the average stock values at the end of the policy year. Excess premiums, if any, are refunded to the policyholder.
3. Floater Declaration Policy
Stock lying at various locations and fluctuating stock value are both part of the above-mentioned policies.
Fire insurance provides covers the following assets
Fire insurance typically provides coverage for assets that are damaged or destroyed by fire. These can include:
- Buildings: Fire insurance can cover the cost of repairing or rebuilding a premise that has been damaged or destroyed by fire, including the structure itself, as well as fixtures and fittings.
- Stock: Fire insurance can cover the value of inventory, goods, or merchandise that has been damaged or destroyed by fire, including raw materials, finished products, and work in progress.
- Contents: Fire insurance can also cover the cost of replacing or repairing personal property that has been damaged or destroyed by fire, such as furniture, electronics, and other belongings.
Regulatory and Implementation Principles for Fire Insurance
A set of fundamental principles governs fire insurance. These principles ensure the fairness, transparency, and efficacy of insurance arrangements for both policyholders and insurers.
Insurable interest: Insurance against fire-related risks is not available without an insurable interest in the property, such as ownership or legal interest.
Utmost good faith (Uberrimae Fidei): If an accurate description of the property is not provided or if facts are concealed, a policy can be voided.
Indemnity: Fire insurance payouts should cover the insured's financial losses, but not allow them to profit from them.
Subrogation: Insurance companies are often allowed to pursue legal action against third parties who may have caused a fire. This practice prevents the insured from collecting insurance proceeds and then suing the negligent party.
Proximate Cause: Unless the fire results from a covered peril as defined in the policy, the claim may not be accepted.
Contribution: Insureds are not entitled to be compensated for more than they have lost, according to this principle.
Deductibles: Insurance premiums can be reduced by increasing the deductible, but the insured must be prepared to pay these costs in the event of a claim.
Exclusions and limitations: It may include specific fire causes not covered by the policy (e.g., arson by the insured) or limits on coverage for certain items (e.g., valuable artwork or jewelry).
Premiums: Many factors influence premiums, including the value of the property, its location, fire protection measures, and the deductible chosen.
Policy conditions: Insureds should carefully review the terms and conditions outlined in their insurance policies, and adhere to any requirements they must fulfill to maintain coverage. Non-compliance can result in claim denials.
Fire insurance is founded on these principles, which ensure fairness, transparency, and effective risk management.
What is not covered under fire insurance?
There are several exclusions in a typical fire insurance policy in India. Some of them are as follows-
- Willful or deliberate acts
- Cold storage stock losses or damage due to temperature changes
- Loss, destruction, or damage directly or indirectly due to war or war-like situations
- Loss, destruction, or damage directly or indirectly caused by nuclear peril.
- Loss, destruction, or damage to the insured property due to contamination or pollution
- Missing property
- Earthquake or Volcanic eruption
- Damages caused by consequential or indirect losses.
- The cost of preparing any claim, including fees and expenses
- A building or premises that is unoccupied for more than 1 month.
- Stones, bullion, or artwork not set, unless otherwise specified.
- Excluding loss or damage to any electrical machine, short circuit, apparatus, leakage of electricity, etc. This exclusion applies to a particular machine.
- Loss or damage due to an act of terrorism, unless specifically covered.
- Loss or damage by spoilage originating from the retardation, interruption, or cessation of any operational process.
- Loss by theft during or after the occurrence of any insured peril (except those provided under Strike, Riot, and Terrorism Damage cover).
How to choose the right fire insurance coverage?
There are a few things to consider when purchasing fire insurance for your business:
1. The value of your building and contents - You will need to insure your building and contents for their full replacement value in order to be fully protected in the event of a fire.
2. The type of business you have - Certain types of businesses may be mandated by law to adopt certain types of fire insurance coverage. For example, businesses that sell flammable materials may be required to carry product liability insurance in case a fire erupts due to one of their products.
3. Your location - If your business is in an area that is prone to wildfires, you will need to make sure your policy covers wildfires in addition to standard fires.
4. The deductible - The higher the deductible on your policy, the lower your premium will be. However, you will need to make sure you can afford to pay the deductible if you do come across a fire incident.
5. The limits - Make sure you understand the limits of your policy and purchase enough coverage to protect your business fully in the event of a fire.
How to Make a Claim on Your Fire Insurance Policy
If your business suffers damage from a fire, you may be able to make a claim on your fire insurance policy. Here are some tips to help you through the claims process:
1. Contact your insurance agent or broker as soon as possible after the fire. They will help you start the claims process.
2. Gather all the documentation you will need to support your claim, including pictures of the damage, receipts for any repairs or replacement of damaged items, and reasonable estimates for repairs. The insurer appoints a surveyor. A list of all items affected and the amount claimed must be submitted to the surveyor, along with an estimate for repair or replacement.
3. Be prepared to answer questions about the cause of the fire and the steps you have taken to prevent future fire incidents.
4. Follow up with your insurance provider regularly to check on the status of your claim.
Frequently Asked Questions
1. Does fire insurance cover any type of property?
A fire insurance policy typically covers property losses or damages caused by fire, lightning, explosions, or other similar perils. Depending on the specific policy and the insurance provider, the coverage and exclusions may differ and may include homes, businesses, vehicles, and personal belongings.
2. What are the main elements of fire insurance?
The following are the major elements of fire insurance
- Coverage
- Premium
- Deductible
- Limits
- Conditions
- Exclusions
3. Is fire insurance available to everyone?
Fire insurance is generally available to anyone who owns or has an interest in property susceptible to fire damage. This includes homeowners, renters, and businesses. The type of property being insured and the eligibility requirements can, however, vary. A property located in an area prone to wildfires, for example, may be subject to limitations or restrictions on coverage if it is deemed at higher risk of fire damage.
4. Fire insurance rules: what are they?
It is important to note that fire insurance rules can vary depending on the specific policy and the insurance provider, but there are a few common principles that apply to most policies. They are:
- Insurable Interest
- Disclosure of information
- Limits of Coverage
- Deductibles
- Duty to Mitigate Loss
- Premium Payments
- Exclusions
5. How fire insurance claims are calculated?
Determining fire insurance claims is a multifaceted endeavor determined by several variables, such as the severity of destruction, insured property's worth, and policy provisions. To commence the claims procedure promptly after a fire incident, individuals should notify their insurer about the loss and initiate the process. Following this step, policyholders ought to furnish their insurance company with an extensive account regarding the extent of damage incurred and provide accurate assessments of lost or damaged property value.
It is the insurance company's responsibility to determine the amount of the claim based on the damage to the insured property. The adjuster may inspect the property and review the policy to determine how much coverage is provided. Once the assessment is complete and the claim has been approved, the insurance company will pay out the amount of the claim, subject to any deductibles or policy limits.
6. What is the typical fire insurance period?
A fire insurance policy's period refers to the time during which it provides coverage for the insured property and is in effect. A fire insurance policy is usually issued for a fixed term, such as a year, and is required to be renewed at the end of the term.
7. How much does the fire insurance policy cover in terms of total loss?
When a fire destroys or damages insured property beyond repair, a total loss is considered a total loss under a fire insurance policy. It is the policyholder's responsibility to receive the full amount of coverage specified in the policy, up to the policy limits, in this case.
Through an evaluation of the damage and the value of the insured property, the insurance company typically determines the amount of the total loss. If the total loss is confirmed, the insurance company will pay out the full amount of coverage specified in the policy, minus any applicable deductibles.
8. What are the biggest risks in fire safety?
- The following risk factors can impact fire safety and insurance coverage related to fire damage:
- The presence of flammable materials, outdated electrical systems, or improper storage of combustible materials can lead to fire damage.
- The risk of fire damage can increase if you do not take adequate measures to prevent fires, such as installing smoke detectors, maintaining fire extinguishers, or having a fire evacuation plan in place
- Wildfires, earthquakes, and floods are all natural disasters that pose a significant risk to property
- The damage caused by arson and other intentional acts may not be covered under standard fire insurance policies because the damage is difficult to prevent.
Conclusion:
Fire insurance remains one of the most important types of coverage for businesses. As a business owner, it is essential to make sure you are adequately covered in case of an unexpected fire. By understanding what your policy covers and taking steps to increase safety measures, you can ensure that your business is prepared if disaster strikes.