Define fire insurance and discus the principles of fire insurance in detail?
Insurance that is used to cover damage to a property caused by fire. Fire insurance is a specialized form of
insurance beyond property insurance, and is designed to cover the cost of replacement, reconstruction or repair
beyond what is covered by the property insurance policy. Policies cover damage to the building itself, and may also
cover damage to nearby structures, personal property and expenses associated with not being able to live in or use
the property if it is damaged.
F.E. Perry:- “fire insurance is a contract of indemnity by which an insurance company undertakes to make good
any damage of by fire to building or property during a specified time”
F.R.Ryder :-“ fire insurance is a contract of indemnity under which an insurance company agrees, in consideration
of the premium paid, to make good any loss or damage by fire during a specified time.”
Exclusions from definition:- A fire insurance policy may contain exclusions based on the cause of the fire, such as
not covering fires caused by wars, enemy attack, including action taken by military force in resisting actual or
immediately impending enemy attack
FUNDAMENTAL PRINCIPLES OF FIRE INSURANCE
The following are the fundamental principles essential for a valid contract of fire insurance.
1.
Insurable Interest: In fire insurance the insurable interest must exist at the time of affecting the insurance
as well as at the time of the loss. The interest, however, may be legal or equitable or may arise under a
contract of purchase or sale.
The following have been held to have insurable interest in the subject matter:
1.Owner, 2. Trustee, 3. Warehouseman, 4. Bailee, 5. Person in lawful possession, 6. Insurer, 7.Executor,
8.Common, 9.Pledgee, 10.Finder, 11. Mortgagee, 12.Commission, 13.Agent where the agency is couppled
with interest and 14. Tenants who are liable to pay rent after a fire.It should however, be noted that
persons can insure only to the extent of such limited interes.
Insured and insurable object b/w should be a pecuniary relation like bank right of mortgage etc. The requirement
of insurable interest gives legal validity to insurance contracts and distinguishes them from wagers. It may be
defined as the legal right to insure, where the right arises out of a pecuniary relationship between the insured and
the subject matter of insurance.
The destruction or damage to the latter involves the insured in financial loss. Absolute legal ownership is a clear
example of insurable interest. For e.g, a bank or a financial institution which has advanced money on the security
of a property has insurable interest in that property.
2.
Contract of utmost Good Faith: The contract of fire insurance is a contract of Uberrimae fidei i.e., a
contract based upon absolute good faith, and therefore, the insured must make full and detailed
disclosure of all material facts likely to affect the judgment of fire officials in determining the rates of
premium or deciding whether the proposal should be accepted. The description of the property, when
asked for, should be correctly give, and all information that may be required as to the class of goods and
articles that are kept on the premises or in the surrounding neighborhood, should be accurately supplied.
The insured has the duty to disclose all material facts, which have a bearing on the insurance. A breach of
this duty may make the contract void or voidable. This principle also expects the insured to act as if he is
uninsured all the time, and takes care and safeguards his assets from the perils.
 Material disclose
 Full and true disclose
 Duties of both parties
Exceptions are like facts which tend lessen the risk, facts of public knowledge, facts which could be inferred
from information disclosed, facts waived by the insurer, facts governed by the conditions of policy.
3.
Proximate cause (Loss through Fire): Loss resulting from fire of some other cause which is the proximate
cause is the risk covered under a fire insurance contract. But where the fire is caused by the insured
himself or with his connivance or by the operation of a peril specifically excluded under the policy like
earthquake, the loss will not be covered.
Proximate cause produces particular, foreseeable consequences without the intervention of any independent or
unforeseeable cause. It is the active, direct, and efficient cause of loss in insurance that sets in motion an unbroken
chain of events which bring about damage, destruction, or injury without the intervention of a new and
independent force. It is also called legal or direct cause.
4.
5.
A Contract from Year to Year: A fire insurance policy is usually for one year only and can be renewed after
that time every year
doctrine of Subrogation: Subrogation is a doctrine applicable to both fire and marine insurance by which
the insurer or underwriter, becomes entitled to on his paying compensation to the insure, to claim the
advantage of every right of the insured against third parties who may be proved to be responsible for that
loss, owning to such third parties negligence, default etc.
The principal of subrogation is the corollary of the principle of indemnity. If the loss suffered by the insured can be
recovered 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.
Essentials of this doctrine:
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6.
Corollary to the principal of indemnity
Subrogation is the substitution
Subrogation only up to the amount of loss
Subrogation may applied before the payment
Not applied in personal insurance
Principles of Contribution:- Where the subject matter has been insured with more than one insurer, each
insurer has to meet the loss only rate ably. If he has paid more than his share of loss, he is entitled to
recover the excess paid from his co insurers. Thus, the principle of contribution applies in the case of fire
insurance.
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, the insured can recover a rate able proportion of the loss under
each policy. Under no circumstances can he recover more than his loss, and make a profit.
7.
A contract of indemnity: Its object is to place insured as far as possible in the same financial position after
a loss as that occupied immediately before the loss. The insured can recover only the amount of actual
loss subject to the sum assured.
The objective of the principle is to place the insured, as far as possible, in the same financial position after a loss, as
that occupied by him, immediately before the loss.
In simple words, the principle of indemnity means the insured is indemnified only to the extent of his loss, no
profit or undue benefit is extended. The indemnity is subject to the sum insured and other terms of the policy. The
sum insured can be fixed on the basis of Reinstatement Value or Market Value. The term 'Market value' means, for
insurance purposes, the present cost of construction of similar buildings, after deducting 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 the cases, depreciation refers to the actual intrinsic
physical depreciation and not those used for accounting purposes
Conditions of indemnification
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How to suffer a loss
Claim not more than actual loss
If claim is more than actual loss then residual to insurer
Third party compensation
Principal of indemnity does not apply to personal insurance
Methods of indemnity
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Cash payment
Repairs (ex motor vehicle insurance, machine and building insurance)
Replacement (ex theft insurance)
Reinvestment (ex destroyed by fire)
8.
Mitigation of Loss - In the event of some mishap to the insured property, the insured must take all
necessary steps to mitigate or minimize the loss, just as any prudent person would do in those
circumstances. If he does not do so, the insurer can avoid the payment of loss attributable to his
negligence. But it must be remembered that though the insured is bound to do his best for his insurer, he
is, not bound to do so at the risk of his life.
9.
Principal of co-operation and probability
10. Aleatory contract or contingent contract
11. Contract of Adhesion insured must accept all conditions in term entire contact
12. General principles of Contract
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Offer and acceptance
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Free consent (free of coercion, undue influence, fraud, misrepresentation)
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Legal consideration (premium)
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Competency
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Legal object (forbidden by law, immoral, opposed to public policy, oppose to any legal provision )
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Mutual consents
13. Return of Premium
Conditions in which the insurer is bound to return the premium are:- No risk- no premium, doctrine of pari delicto,
Frustration and impossibility, None disclosure of facts, Fraud by the insurer or his agent, Cancellation and
Rescission, Surrender of policy, Ignorance of fact
14. Warranties
It is commitment to do, or not do to something, by the insured to the insurer. It may of any following figure.
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Expressed (mentioned in policy)
Implied (not mentioned in policy)
Affirmative (which are answer to questions)
Promissory (fulfilling certain conditions or promise)
15.Assignment or transfer of interest
It is necessary to distinguish between the assignments of
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Subject matter of insurance
The policy
The policy money when payable
The marine and life insurance can be freely assigned but assignment under fire and accident insurance is not valid
without the prior consent of the insurer-except the change interest by will or operation of law. Moreover,
assignment under fire and accident policies must be made before insured parts with his interest. Once he has lost
the interest, the policy is void and cannot be assigned