Godown Fire: Arson, Premium Timing and Consequential Loss
A fire at a third-party godown destroys 4,000 cartons of packaged food products insured under a fire policy with a stock sum insured of Rs 2 crore. The insured claims Rs 1.75 crore. The fire brigade report says the fire started in an adjacent scrap yard and spread; the insured's security guard says he saw two men running away. The insured's stock statement for the quarter shows stock of Rs 2.6 crore, and purchase invoices for the last two months are not available. The policy has a removal of debris limit of 2% and a deterioration of stock exclusion. The insured also claims Rs 18 lakh for debris removal and Rs 25 lakh for loss of market due to delayed delivery. You notice the insured had increased the sum insured from Rs 1.5 crore to Rs 2 crore only 10 days before the fire, and the premium cheque cleared on the day of loss.
1. Identify the coverage issues and the evidence you need on arson, underinsurance, debris removal and consequential loss.
Read the worked answer
Fire is a covered peril, and a fire started by third parties in an adjacent scrap yard is ordinarily covered. Arson becomes a coverage issue only if the insured or his agents were involved. The surveyor should obtain the FIR, fire brigade report, forensic report, CCTV footage, security guard's statement, entry records and the scrap yard owner's details. The two men running away support third-party causation but need investigation.
Underinsurance is a clear issue: stock at risk is Rs 2.6 crore against a sum insured of Rs 2 crore, so the average ratio is 2/2.6 = 76.92% if that stock figure is accepted. Debris removal is capped at 2% of sum insured, i.e. Rs 4 lakh, not Rs 18 lakh. Loss of market due to delayed delivery is consequential loss and is not covered under a standard fire policy unless business interruption cover is specifically purchased. The deterioration exclusion may apply to food spoilt after the fire, but not to stock actually burnt; the surveyor must separate the two.
2. How should you handle the premium cheque clearing on the day of loss and the recent increase in sum insured?
Read the worked answer
Under Section 64VB of the Insurance Act, 1938, the insurer does not assume risk unless the premium is received in full before the cover commences. If the cheque was realised before the time of loss, cover exists; if realisation was after the loss, there is no cover for that loss. The surveyor should obtain the bank realisation certificate, the cheque deposit slip and the exact time of loss from the fire brigade and guard. The fact that the cheque cleared on the same day is not enough; sequence matters.
The increase from Rs 1.5 crore to Rs 2 crore ten days before the loss is not invalid by itself. The insurer should check the proposal or endorsement request, whether it disclosed the current stock value, and whether the premium for the increase was received. If the insured misrepresented the stock value to obtain a higher sum insured, the policy may be voidable for misrepresentation. The surveyor should report the facts and chronology, not decide the legal validity of the policy.
3. What should your report conclude on each head, and what is the recommended approach to the claim amount?
Read the worked answer
The report should separate the heads. On stock: admit only the proven fire-damaged stock. If the stock at risk is accepted at Rs 2.6 crore, apply average of 76.92% to the proven stock loss; if the stock records are unreliable, require purchase, sales, GST and bank records before admitting the figure. On debris removal: allow actual expenditure subject to the 2% cap of Rs 4 lakh. On loss of market: recommend rejection as consequential loss not covered by the policy. On arson: state that third-party fire is covered unless evidence links the insured; if evidence links the insured, recommend referral to the insurer for a coverage decision.
A practical calculation would be: proven stock loss × 76.92%, plus debris removal up to Rs 4 lakh, less salvage and policy excess. The Rs 25 lakh market-loss claim should be excluded. If the premium was not realised before the loss, the entire claim fails under Section 64VB. The report should set out the chronology and documents so the insurer can decide.