Fire and Consequential Loss Insurance Claims
This domain covers fire material damage and the consequential loss that follows. Expect questions on the Standard Fire and Special Perils Policy, add-ons, reinstatement value, average, indemnity period and business interruption calculations.
Core rules
- The Standard Fire and Special Perils Policy covers fire, lightning, explosion/implosion, aircraft damage, riot, strike, malicious damage, storm, flood, inundation, subsidence, landslide, and bursting or overflowing of tanks, subject to exclusions.
- Common exclusions include war, nuclear risks, pollution, own fermentation, electrical or mechanical breakdown, and loss caused by the insured's deliberate act.
- Add-ons include earthquake, terrorism, removal of debris, architects' fees, escalation and loss of rent.
- Material damage is settled on market value or reinstatement value. Under the average clause, underinsurance reduces the claim.
- Consequential loss cover pays loss of gross profit and increased cost of working during the indemnity period. The material damage proviso usually requires the material damage claim to be admitted.
Worked example
A factory insured for ₹1 crore on reinstatement value suffers a ₹30 lakh fire loss; reinstatement value at loss is ₹1.25 crore. Material damage claim = 1/1.25 × 30 = ₹24 lakh. For business interruption, gross profit sum insured is ₹50 lakh, gross profit rate 20%, shortfall in turnover ₹80 lakh, savings in standing charges ₹10 lakh, increased cost of working ₹5 lakh. Gross profit loss = 20% × 80 = ₹16 lakh; less savings ₹10 lakh = ₹6 lakh; plus increased cost ₹5 lakh = ₹11 lakh, subject to the sum insured and average.
Traps
Do not confuse turnover with gross profit. Do not extend the indemnity period beyond the stated period. Do not ignore savings in standing charges. Do not settle consequential loss if the material damage proviso is unsatisfied.