Meaning, Policies and Procedures of Effecting Fire Insurance

Meaning of Fire Insurance

Fire insurance is a specialized form of insurance. It is designed to cover the cost of replacement, reconstruction or repair beyond what is covered by property insurance policy. Fire insurance is insurance that is used to cover damage to property caused by fire.

Fire insurance is the most important type of insurance which provides the security against the risk of fire. In fire insurance, there is a contract between insured and insurer. The insured has to pay the premium at a fixed rate to insurer and insurer compensates the insured amount to the insured party if the property of insured is lost due to the reason of fire. The insurer doesn’t compensate more than insured amount even if the loss is estimated more than insured amount. The concept of fire insurance was developed before the concept of life insurance.

A fire insurance is defined as ‘an agreement’ where one party in return for a consideration undertakes to indemnify the other party against financial loss. It may sustain by reason of certain subject-matter being damaged or destroyed by fire or other defined perils up to an agreed amount.(Agrawal)

Policies of Fire Insurance

A. On the basis of indemnity

On the basis of indemnity, fire insurance policies are classified as follows:

1. Valued Policy
In this policy, the value of the subject-matter is agreed upon at the time of taking up the policy. These policies are generally issued for those goods or property whose value cannot be determined after their loss or damage. These goods include works of art, jewellery, paintings, etc. The policy is named as valued policy when the agreed value of subject matter is mentioned in the policy. This value may not necessarily be the actual value of the property. In the event of loss of the fire, the insurer pays the admitted value of the property.

2. Specific Policy
Under this policy, the risk is insured for a specific sum. In the case of loss of property, the insurer will pay the loss amount if it is less than the specified amount. This policy is used when insurance of property is made less than the actual amount. A specific policy is an example of underinsurance. The insurer inserts an average clause in such a policy so that in the event of loss, he only bears the rateable proportion of such loss.

3. Average Policy
A policy which incorporates average clause and both insured and insurer bear the amount of loss on the proportionate basis is known as the average policy.The compensation payable is proportionately reduced if the value of the policy is less than the value of the property. Suppose, a person takes up a fire insurance policy of Rs. 30,000 and the value of the property are Rs. 40,000. If there is a loss of property worth Rs. 20,000, the underwriter pays compensation of Rs. 10,000 that is 50%. It discourages the insured to get the under-valued policy.

4. Valuable policy
Under this policy, the property whose value may be difficult to determine after their loss and damages,the market value of the property at that time will be taken as the basis for the valuation and compensation of loss. This policy really follows the principle of indemnity.

5. Replacement Policy
Under this policy insurance company pays more than the actual value of the property destroyed by fire in order to cover the cost of replacement of the said property. The market value of the property at that time will be taken as the basis for the valuation and compensation of loss. This type of policy is not very common in these days.

B. On the basis of goods

1. Floating Policy
A floating policy is that which covers the fluctuating risk of several goods lying in different localities for supply to various markets. Such policy is usually taken out under one sum and one premium by the businessman. A floating policy is used to cover the risk of goods lying at different places. The goods should belong to the same person and one policy will cover the risk of all these goods.

2. Adjustable policy
According to the changes of the stock, the insured amount is also changed. The premium is calculated according to the insured amount and the insured amount changed. Under this policy, the insured amount is based on the value of existing stock in the beginning and late exited according to information received on the changes of stock.

3. Excess policy
An excess policy is supplementary of fire insurance policy. It is purchased to cover additional risks beyond the coverage of original loss policy. The kind of fire policy is purchased by such merchants whose stock fluctuates from time to time. In this policy, the actual value of the excess stock is declared in a certain period of time.

4. Declaration Policy
Under this policy, the insurance of maximum amount of goods is made on the basis of past experience. The three-fourths of the premium payable is charged from the insured in advance, at the beginning of the contract. Every month the policyholder is required to declare the value of the present stock.

C. On the basis of risk covered

1. Comprehensive Policy
A policy may be issued to cover risk like fire, explosion, lightning, burglary, riots, labour disturbances etc. This is called a comprehensive policy or all risk policy. After purchasing this policy, insured gets the protection of properties against losses during specified period. The premium rate is higher in such policy.

2. Consequential loss policy
It is a policy under which the insurer agrees to pay the insured for the loss of profits which he suffers to his business caused by fire. It is also known as loss of ProfitInsurance. The consequential loss policy provides indemnity to the insured for loss of income, payment of expenditure like rent, salary etc.

3. Blanket policy
Under Blanket policy, all the fixed and current assets of a manufacturer or a trade of different buildings can be covered by one policy at the same premium. An insured can include all types of properties with the house including furniture, machine, and other goods.(tyrocity.com)(Money matters)

Procedures of effecting fire insurance policies

The following steps are observed while effecting fire insurance policy:

1. Filling up Proposal Form
The insurance company provides proposal form which must be filled by the client. Many questions are included in it.Generally, name, age, address, occupation, father’s name, gender, nominee’s name etc are expressed in the form. Likewise, value and nature of property, method of paying the premium are also listed. To take a fire insurance policy, a person has to select and contact a fire insurance . While filling up the proposal form, the principles of good faith must be observed and he has to fill up the form with utmost good faith.

2. Evidence of Respectability
Evidence of respectability recommends that an individual is respected personnel and has a good character. The proposer may submit this report only if necessary. Since the insurance policy covers a high degree of moral hazards, these considerations are to be kept in mind. Evidence of respectability recommends that an individual is respected personnel and has a good character. The proposer may submit this report only if necessary.

3. Survey of the Property
All people are not honest therefore insurance company appoints the survey. To survey about the property server evaluate the proposed property in the form of amount and server prepares a survey report. This report is submitted to the office of the insurance company. The proposed property to be insured is surveyed by an expert called the surveyor. They survey the property and estimate the degree of risks involved in such property. On the basis of the report of the surveyor, the insurer accepts or rejects the policy.

4. Accepting Proposal and Issuing of cover note
After the receipt of surveyor’s report, it is scrutinized to see whether risks is acceptable. The insurance companies make the decision about accepting or rejecting the proposal only after studying all the information about the proposal from the report of survey .It must be very careful. If any negative information is found they should be rejected.

5. Issue of Final Policy
The insurance company prepare and issues a legal and formal document of insurance. The policy document is prepared after the issue of cover note. It is duly stamped document which contains terms and conditions of the insurance. This policy serves as an evidence of insurance between the insured and the insurer.

(Puranik)

Bibliography

tyrocity.com. n.d. Electronic. 15 06 2016.http://notes.tyrocity.com/types-of-fire-insurance/

Investopedia. n.d. Electronic. 15 06 2016.http://www.investopedia.com/terms/f/fire-insurance.asp

Money matters.n.d. Electronic. 15 06 2016. http://accountlearning.com/types-of-fire-insurance-policies/

Puranik Amey. publish your article.net. Electronic. 15 06 2016http://www.publishyourarticles.net/knowledge-hub/business-studies/what-are-the-procedure-for-effecting-fire-insurance/840/