A Layman’s Guide to Fire Insurance
As the name suggests, fire insurance is purchased to ensure coverage against losses and damages
caused by fire. It is a type of insurance product that is offered by all leading general insurance
companies in India. With adequate fire insurance covers the policyholder can cover the risk of any
loss of property caused by an accidental and unintentional fire.
Origins and Basics
As people ventured more and more into the high seas, the need for marine insurance was soon
realized. Fire insurance, on the other hand, was born recently, rising from the ashes of the great
fire of London in 1666 that doused over 13,000 homes in a mere four days.
Fire insurance is designed to cover the insured person for the damage caused by a fire and
compensate for the losses incurred. Control and prevention of fire are not a part of the policy
coverage. A fire insurance policy is a contract between the insurance company and the policy
buyer. The insurer agrees to compensate the insured person for any losses incurred while the
insured person agrees to pay a premium amount for the coverage.
Scope and Exclusions of Fire Insurance
The extent of coverage of a fire insurance policy is subject to the sum assured in the policy
document. Thus, the actual damage caused during the fire is not the scope of coverage and is
instead compared to the sum assured. Besides, the coverage is also subject to the terms and
conditions of the specific policy.
The scope of a typical fire insurance policy includes,
- Products lost during the fire,
- Living costs incurred due to damage to personal property,
- Damages to neighbouring buildings or properties caused because of the fire in the insured
Loss of rent due to damage to house property,
Compensations paid to firefighters,
A fire is caused by electrical malfunctions or faulty connections.
Exclusions from a fire insurance policy include,
- Fire resulting from emergencies like war, riots, or earthquakes,
- A fire caused intentionally,
- If the fire was caused during a burglary incident.
Types of Fire Insurance Policy
The major types of fire insurance policies available in India include the following,
- A Valued Policy is a fire insurance policy where an agreement is framed requiring the insurer
to pay for the destruction of property by fire.
- Specific Policy insures fire risk for a specific amount only. If a policyholder incurs any loss
under this policy, the insurer pays for the loss only up to the sum specified in the policy. The
value of the property is not a consideration in a specific policy.
- An Average Policy is applicable where the property is insured for a sum smaller than its value.
In an average policy, the insurance company compensates in proportion to the actual loss.
The compensation is calculated in the proportion of the sum assured to the actual value of
the property at the time of loss.
A Floating Policy is a type of fire insurance policy that covers multiple types of properties with
a single sum assured and premium. Such properties may be lying at various locations. The
floating policy premium is the average of all the premiums applicable if each such type of
property would have been insured under specific policies.
A Blanket Policy is similar to a floating policy. It covers all fixed and current assets of the
policy buyer under one policy.
First Loss Policy and Excess Policy – There may be instances where the property value being
insured fluctuates. In such circumstances, the policy buyer can buy a policy for a property
value below which the stocks are unlikely to fall. This is called a First Loss Policy. On top of
that, the insured can consider another insurance policy that protects the same stock for the
maximum amount they may fluctuate up to. This would then become the Excess Policy.
A Comprehensive Policy covers various other risks apart from fire. It can include risks like
floods, riots, strikes, burglary etc. A comprehensive policy offers coverage up to a pre-
A Consequential Loss Policy covers consequential loss of profit caused due to an interruption
in business due to the fire. Also known as a loss of profit policy, this extends the coverage you
get from a typical fire insurance policy.
A Reinstatement Policy pays an amount to the insured person that is required to reinstate the
assets or property damaged by the fire.
In an Open Declaration Policy, the insured makes a declaration of the value of the property
with the insurance company. The value respective to the period is considered in such a
declaration, and a fresh declaration may be submitted at a predefined interval. This policy is
useful in the case of property or stocks whose value fluctuates regularly.
Key Principles of Fire Insurance Policy
Here are the key principles of fire insurance,
- Insurable interest in fire insurance is present in a property when the insured benefits from its
safety and incurs damage when it is damaged,
- The principle of good faith expects the insurer to reveal all material facts to the insurer,
- The principle of indemnity aims to compensate the insured back to the same financial
The proximate cause rule says that the proximate cause is considered in fire insurance over
any other remote causes,
The doctrine of subrogation outlines the right of one person to act in another’s place,
Warranties are the assurances that specific conditions will or will not be fulfilled.
Choosing a Fire Insurance Plan
While selecting a fire insurance policy you must consider these factors,
Right coverage – Merely getting fire insurance coverage is not enough. Having adequate
insurance coverage is essential to make sure that the policy compensates the policyholder
sufficiently in the event of a loss. As a policy buyer, you must prepare a list of items that need to
be insured along with the correct value of the items.
Scrutinizing the exclusions and scope – While selecting a fire insurance policy, you must
understand what the policy covers, what is the extent of coverage in terms of monetary value,
and what is excluded. Typically, damage caused by fire due to negligence, emergencies etc. are
excluded. The exclusions of the fire insurance policy must be checked thoroughly to avoid
rejection of your claim.
Manage the premium – The premium amount can be reduced by displaying prudent safety
practices to the insurer. The insurance company is likely to inspect your safety measures while
processing the fire insurance policy application. The presence of safety measures and equipment
like smoke detectors and fire extinguishers can lower the premium rates.
Compare – Based on the above considerations, carefully compare the different fire insurance
quotes received from various insurance companies.
In a densely populated country like India, fire-related incidents are very common. Besides
electrical malfunctions and natural disasters add to the risk. Both businesses and households
suffer significant financial losses as well as damage to property and assets. With fire insurance,
you can mitigate the financial loss from such incidents and get compensated for the damages.
Besides, fire insurance is compulsory for several types of businesses in India.
To protect your personal property and household with financial cover and ensure that your
business is not interrupted by this unfortunate probability, having fire insurance coverage is a