Fire Policy: Short Circuit, Ensuing Fire and the Electrical Apparatus Exclusion
A textile mill has a Standard Fire and Special Perils policy. A short circuit in a distribution board starts a fire that destroys the board, adjacent cables and a large quantity of cotton yarn. The policy excludes loss or damage to electrical apparatus caused by short circuit but covers fire. The insurer pays for the yarn but rejects the distribution board and cables, relying on the exclusion. The insured argues that the board and cables were destroyed by the fire, not by the short circuit, and that the fire peril is dominant. The loss adjuster finds that the board shows arc damage before the fire; the cables were damaged by both heat and fire. The value of the board is ₹8 lakh, cables ₹12 lakh and yarn ₹60 lakh. There is also a firefighting expenses claim of ₹5 lakh. The policy has a ₹5 lakh deductible.
1. Determine the insurer's liability for the board, cables, yarn and firefighting expenses, applying the proximate cause rule and the electrical apparatus exclusion.
Read the worked answer
The yarn loss is covered: it was destroyed by fire, an insured peril. The firefighting expenses are covered if the policy has a firefighting expenses clause; they were incurred to extinguish the fire and protect the property, and they are not subject to the electrical exclusion. The board and cables require the exclusion wording to be read carefully. The standard exclusion is for loss or damage to electrical apparatus caused by short circuit, but it usually adds 'unless fire ensues, and in that event the loss or damage by fire only is covered.' The arc damage to the board is excluded. The fire damage to the board and cables is covered. If the loss adjuster can separate the arc damage from the fire damage, the insurer pays the fire portion. If not, the insured must prove the fire damage; the insurer cannot use the exclusion to deny the whole board if fire contributed. The ₹5 lakh deductible applies to the total claim once, not to each item. On the figures, the yarn ₹60 lakh plus firefighting ₹5 lakh = ₹65 lakh, less ₹5 lakh = ₹60 lakh, plus any fire-damaged portion of the board and cables. The ₹20 lakh for board and cables is not automatically payable; only the fire-damaged part is.
2. How would you apportion the damage if the loss adjuster cannot separate arc damage from fire damage on the board and cables?
Read the worked answer
Where damage is indivisible, the dominant cause test is used. The short circuit is the initiating event, but the destruction of the board and cables by fire may be the dominant cause of the loss. The policy's proviso is designed for this: it covers fire damage only. The insurer should appoint a forensic electrical engineer to examine the board for arc tracking versus fire damage. If the evidence shows the board was destroyed by the arc before the fire, that part is excluded. If the fire was the effective cause of the collapse and the arc damage was minor, the fire portion is covered. If the evidence is genuinely inconclusive, the insurer should not simply reject the claim; it should consider a negotiated apportionment on the basis of the engineer's findings, with the insured bearing the uncertainty for the excluded peril. The burden is on the insured to bring the loss within the fire peril, but the insurer must prove the exclusion applies. A 50:50 split may be a commercial settlement, not a legal rule. The deductible is applied once to the agreed covered amount.