Fire Insurance: Policy Structure, Sum Insured and Claims
Fire Insurance in IC-57 tests whether you can apply indemnity to property damage: the standard fire policy, optional perils, sum-insured bases, average, and claim mechanics. Expect calculations and exclusion-based reasoning rather than broad risk-management theory.
Core rules
- Insurable interest must exist at the time of loss; indemnity, proximate cause and utmost good faith drive claim decisions.
- The Standard Fire and Special Perils Policy normally covers fire, lightning, explosion/implosion, riot/strike/malicious damage, storm/tempest/flood/inundation, subsidence/landslide, missile testing, aircraft damage, sprinkler leakage and bush fire. Earthquake and terrorism are usually optional add-ons, so check the policy schedule.
- Exclusions include war, nuclear risks, electrical/mechanical breakdown, theft/burglary, wear and tear, inherent vice and own fermentation. Fire following an electrical short circuit is covered for the resulting fire damage, but not for the electrical apparatus itself.
- Sum-insured bases are indemnity value (depreciated/market value), reinstatement value (new for old, subject to the reinstatement condition) and agreed value. A reinstatement policy still carries an average clause.
- Average clause: claim = loss x sum insured / value at risk. Deduct the policy excess after applying average.
- Claims require prompt notice, mitigation, salvage preservation, surveyor involvement where applicable, documents, subrogation and contribution.
Worked example
A warehouse has a reinstatement value of INR 1 crore but is insured for INR 60 lakh. Fire loss is INR 20 lakh and the policy excess is INR 20,000. Average applies: 20 lakh x 60/100 = INR 12 lakh. Less excess: INR 11.8 lakh. If the insured does not actually reinstate, a reinstatement policy may pay only the depreciated indemnity value, so the claim can be lower. The average denominator is the value at risk, not the sum insured.
Traps that cost marks
Treating flood or earthquake as always automatic; using market value as the sum insured for a reinstatement policy; ignoring average; adding debris-removal costs without checking the sub-limit; assuming electrical breakdown itself is covered; forgetting that salvage value reduces the claim.