The Isfahan Worsted Mill Fire: Average, Consignment Stock and an Electrical Origin
A fire broke out at 02:40 in the dyeing hall of a worsted-fabric mill in Isfahan and was extinguished by the plant's own brigade and the municipal fire service. The fire report records the seat of the fire at a distribution board serving three stenters. The policy is a standard fire policy with sums insured of 60 billion IRR on buildings, 40 billion on plant and machinery, and 45 billion on stock and stock in trade, plus debris-removal cover of 2% of the sum insured on the damaged property. The survey establishes: building damage 12 billion, including 3 billion to a roof section already scheduled for replacement this financial year; machinery damage 9 billion; stock destroyed 25 billion, of which 4 billion was finished goods held on consignment for a customer; debris-removal cost 1.8 billion. At the date of loss the reinstatement value of the stock, on the same basis as the declaration, was 60 billion. The insured's accountant admits that stock was deliberately under-declared to keep the premium down. The electrical contractor reports that the board had been overheating for weeks and that a maintenance work order had been raised but not carried out.
1. Apply the average condition to the stock loss and state the amount payable for stock. Show every adjustment you make.
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Step 1 – Establish the insurable stock loss.
The declared sum insured on stock is 45bn; the value of the insured stock at the date of loss, on the same basis as the declaration, is 60bn. The 4bn of finished goods held on consignment belong to the customer. The mill is a bailee and has no insurable interest in their full value, so they drop out of the insured's own stock figure unless the policy carries a 'property held in trust or on commission' extension. Insured stock loss = 25 − 4 = 21bn.
Step 2 – Apply the average condition.
45 / 60 = 0.75, so the payable amount is 21 × 0.75 = 15.75bn. Average is proportional (it puts the insured in the position he would have occupied had he declared correctly); it is not a penalty, and it does not by itself entitle the insurer to decline.
Step 3 – Check the clause before committing.
Many fire wordings in the Iranian market apply average only where the sum insured falls below a stated percentage of value (commonly 80%), or use a 'declared value' or 'first loss' basis. If the policy uses either of the latter, the calculation above is wrong and must be reworked. Also check whether average operates on the whole policy or separately on each item – here it is applied to the stock item only.
Step 4 – The deliberate under-declaration.
Deliberate under-declaration to reduce premium is a breach of the duty of utmost good faith and supports the average calculation as a contractual consequence. Whether it goes further (avoidance for misrepresentation) depends on whether the misstatement induced the terms of the policy; the deliberate nature is relevant to that argument but is not needed to justify the 15.75bn figure.
2. The insurer's surveyor proposes declining the machinery damage because 'short-circuiting and electrical failure are excluded'. Assess that position.
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Identify what the exclusion actually says.
The common electrical exclusion bites on loss of or damage to the electrical apparatus itself caused by short-circuiting, over-running, excessive current or similar electrical phenomena. It is an apparatus-damage exclusion, not a fire exclusion. It does not remove the fire peril from the policy.
Identify the proximate cause.
The board failed, heat built up and a fire started; the fire then damaged the machinery and the building. The proximate cause of the machinery damage is fire, an insured peril. The initiating electrical event is part of the history, not the operative cause of the loss. Declining 9bn of machinery damage on this ground would be wrong unless the wording clearly excludes loss arising from electrical failure in any property, which is unusual and should be quoted verbatim before any decision.
Carve-out.
The distribution board itself (and any cabling damaged by the electrical event before the fire) may fall within the apparatus exclusion. If the board's own value is identifiable within the 9bn, deduct that element and pay the remainder.
The prior overheating.
Weeks of overheating, with a work order raised and not executed, is relevant in two ways: (i) if the policy carries a 'reasonable precautions' or maintenance warranty, the insurer may have a reduction or a defence – check the precise wording and whether it is a condition precedent; (ii) in any event it supports subrogation or recourse against the maintenance contractor. Wear-and-tear and inherent-vice exclusions do not defeat a loss by fire that the wear and tear merely made possible.
Recommendation. Pay the fire damage to machinery and building, deduct the excluded apparatus element if evidenced, and reserve rights under the maintenance condition pending the contractor's report.
3. Deal with the roof section, the debris-removal claim and the total settlement, and explain what subrogation rights survive payment.
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Roof section (3bn within the 12bn building damage).
The roof was already programmed for replacement this financial year. The insured has lost a roof that was at the end of its life, not a new roof. Under a reinstatement wording, condition requirements (actual reinstatement, adequate sum insured, reinstatement actually carried out) must be satisfied, and the betterment represented by the planned renewal must still be deducted. Measure the loss as the depreciated value of the old roof, or the repair rather than replacement cost, and deduct the betterment element from the 3bn. If the policy is on an indemnity (depreciated) basis the same result follows more directly. Do not pay new-for-old on a component the insured was about to write off at his own expense.
Debris removal.
Limit = 2% of the sum insured on the damaged property. Taking buildings and machinery (the damaged property), 2% × 100bn = 2bn. Actual cost 1.8bn is inside the limit, so pay 1.8bn in full, subject to any separate average application if the clause says so.
Indicative total.
Buildings 12bn less betterment on the roof (say 1.5bn on a depreciated measure) = 10.5bn; machinery 9bn (less any excluded apparatus value); stock 15.75bn; debris 1.8bn. Present the arithmetic transparently rather than a single lump figure.
Subrogation.
On payment the insurer is subrogated to the insured's rights against the negligent maintenance contractor, up to the amount paid, and the insured must not prejudice those rights (no waiver, no settlement with the contractor without consent). Check whether the contractor is a named insured or co-insured under the policy, in which case subrogation is waived. Note also that if the insured recovers from the contractor after the insurer has paid, the recovery is held for the insurer to the extent of the payment.