Average clause and electrical short circuit in a shop fire
Mr. Suresh runs a hardware shop and takes a Standard Fire and Special Perils policy for ₹40 lakh on stock and ₹10 lakh on the shop building. In the proposal he states the stock value as ₹40 lakh and the building value as ₹10 lakh. Six months later, festival-season stock has grown to ₹65 lakh. A short circuit in a defective stabiliser causes sparks that ignite thinner and paint stored near the counter. Fire destroys stock worth ₹26 lakh and causes ₹3 lakh damage to the building; the building's actual value at the time of loss is ₹12 lakh. The policy has a ₹10,000 deductible for each claim. The surveyor confirms that fire ensued from the short circuit and that paint and thinner were stored in the shop, although the proposal did not mention them. Suresh claims the full ₹29 lakh.
1. Is the loss caused by the short circuit covered under the Standard Fire and Special Perils policy?
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The claim turns on the distinction between damage by short circuit and damage by fire. A standard fire policy covers fire, lightning, explosion, and specified perils; damage caused solely by electrical short circuit or overrunning is generally excluded. But where a short circuit causes a fire and the fire damages the property, the fire loss is covered unless another exclusion applies. Here the surveyor confirms that sparks from the stabiliser ignited thinner and paint and that fire destroyed the stock and damaged the building, so the loss is a fire loss, not merely an electrical short-circuit loss. The defective stabiliser itself may be excluded, but the stock and building damage is covered. The storage of paint and thinner is a separate issue: if the proposal asked about hazardous goods and Suresh failed to disclose them, the insurer may argue material non-disclosure. The agent should not settle on the assumption that every short-circuit claim is excluded; causation must be established.
2. Calculate the settlement for the stock and building after applying the average clause and deductible.
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The average clause applies separately to each item where the sum insured is less than the value at risk. For stock, sum insured is ₹40 lakh and value at risk at loss is ₹65 lakh, so the claim is ₹26 lakh × 40/65 = ₹16 lakh. For the building, sum insured is ₹10 lakh and value at risk is ₹12 lakh, so the claim is ₹3 lakh × 10/12 = ₹2.5 lakh. The deductible of ₹10,000 applies to each claim, so the stock payment is ₹16,00,000 − ₹10,000 = ₹15,90,000 and the building payment is ₹2,50,000 − ₹10,000 = ₹2,40,000. The total before any non-disclosure adjustment is ₹18,30,000, not the ₹29 lakh claimed. If the insurer validly avoids the policy for non-disclosure of paint and thinner, the payable amount could be nil; if it does not avoid but applies a loading or condition, the average-clause figures remain the starting point. The agent should explain that the sum insured must reflect the maximum value at risk, especially for seasonal stock.
3. How should the non-disclosure of paint and thinner affect the claim? What should the agent have done at proposal stage?
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Paint and thinner are hazardous goods and materially affect fire risk. If the proposal form asked whether the premises stored flammable liquids or hazardous goods, and Suresh answered no or left it blank, the insurer may treat this as material non-disclosure and avoid the policy or reduce the claim. The insurer must show that the question was asked and that the information was material to underwriting. If the proposal did not ask, or if the quantity was small and incidental to a hardware shop, the insurer may not be able to avoid the policy; it may instead apply a condition or charge additional premium. The agent should have inspected the shop, asked about storage of paint, thinner, LPG or other hazardous goods, and recorded the answer in the proposal. The agent should also have explained the average clause and advised Suresh to revise the sum insured as stock grew. At claim stage, the agent should not promise payment before the insurer decides the non-disclosure issue.