This article has been written by Shreya Patel, from the Maharaja Sayajirao University, Vadodara.
Table of Contents
Meaning
After marine insurance, fire insurance was created. Only those involved in any kind of trade will benefit from marine insurance. People from all walks of life may be affected by the flames. In four days, the Great Fire of London of 1956 burned 13,000 homes. Fire insurance was born as a result of the “Great Fire.” Fire insurance is a contract that indemnifies the insured for losses incurred. This contract does not aid in the control or prevention of fire, but it does pledge to compensate for the damage. Fire insurance is a contract between two parties, namely, the insurer and the insured, under which the insurer agrees to compensate the insured for losses incurred in exchange for the insured paying an amount known as the “Premium.”
A fire insurance contract is described as “an arrangement” in which one party, in exchange for a consideration, agrees to indemnify the other party for financial loss sustained as a result of the certain subject matter being damaged or destroyed by fire or other defined perils up to an agreed sum.
Fire insurance is a form of property insurance that offers extra compensation for loss or damage to a building that has been damaged or destroyed by a fire. Fire insurance can be capped at a rate lower than the expense of the damages incurred, necessitating the purchase of a separate fire insurance policy. The policy reimburses the policyholder for losses on either a replacement-cost or a real cash value basis. While some homeowners insurance plans offer fire coverage, some homeowners can find it insufficient.
The word fire insurance refers to a form of property insurance that covers fire-related damage and damages.
Most plans provide some form of fire insurance, although homeowners may be eligible to buy extra coverage in the event that their property is destroyed or damaged by fire. Purchasing extra fire coverage helps to offset the cost of replacing, repairing, or rebuilding property that exceeds the property insurance policy’s cap. General exclusions such as war, nuclear risks, and similar perils are common in fire insurance policies.
The word “fire” must meet two requirements:
(a) There must be actual fire or ignition; and
(b) The fire must be accidental.
The property must have been harmed or burned by fire. If the property is destroyed by heat or smoke without being ignited, it is not protected by the term “fire.”
Procedure for Fire Insurance
When an individual or a business needs to insure their property, they must fill out a proposal form. The form includes columns for details about the insured land. The proposal includes information about the house, its location, and its contents. All of the questions on the questionnaire must be answered correctly by the insured.
A fire insurance policy is based on trust. When an underwriter receives a request, he or she evaluates the potential loss. The plan may be approved upon receipt, or a surveyor may be dispatched to evaluate it. The contract is established when the underwriter approves the proposal. Occasionally, a cover note is released immediately, and the policy is submitted later. The insurer is obligated to indemnify the liability under a cover notice. The risk coverage begins with the payment of the premium.
A fire insurance policy is typically provided for one year, although it can be reviewed on a regular basis. The insurance agent notifies the insured two weeks before the policy’s expiration date so that it can be extended. However, once the program expires, there is a two-week grace period. The insured will renew it during the grace period, and insurance coverage is maintained in the meantime.
The insured must have an insurable interest in the property to be insured both at the time the policy is taken out and at the time the loss occurs. If the insurable interest is transferred to another individual, the insurance policy terminates unless the underwriter (insurance company) agrees to extend it.
Principles of Fire Insurance
The following are the principles of fire insurance:
- Insurable Interest in fire insurance.
- The principle of Good Faith in fire insurance.
- The principle of indemnity.
- Proximate Cause of fire insurance.
- The doctrine of Subrogation.
- Warranties in fire insurance.
Insurable Interest in Fire Insurance
Insurable interest is the general concept of insurance without which an insurer cannot be legally applied because insurance without insurable interest is a gambling transaction.
Insurable interest exists where the subject matter is in such a position that the insured may incur loss during the period of harm and may benefit from its safety. The insurable interest in fire insurance must be present at the time of contract and must continue over the term of the policy and at the time of failure. If the property is sold to another party, the insurance contract will be null and void.
Similarly, if no insurable interest exists at the time of insurance, the policy is null and void. To be considered an insurable interest, the following conditions must be met. There must be a tangible entity that can be damaged or destroyed by fire. The subject matter of insurance must be the object.
The insured must be in a legally recognized partnership in which the insured benefits from the subject-protection matter or is prejudiced by its loss.
The ‘pecuniary interest’ is the insurable interest. Fire insurance is a private agreement between the insured and the insurer. As a result, the transfer of interest will render the contract null and void.
The following individuals have an insurable interest in the subject matter at hand:
- If he is the lawful or equal owner, the owner of the property or asset, whether fixed or present, has an insurable interest. The holder may be a sole or joint holder. As trustee of all the land, the partial owner will carry out a policy for the maximum value. A life tenant with the right to use the property for the rest of his life has only an insurable interest.
- An agent has an insurable interest in his principal’s land.
- A partner has an equal stake in the company’s assets.
- A borrower has an insurable interest in the property on which he has a debt lien.
- It is owned by an insurer in relation to risks underwritten by him for the purpose of reinsurance.
- If the subject matter is mortgaged, the mortgagor has an insurable interest in the full value of the subject matter, and the mortgagee has an insurable interest in any amount due to become due under the mortgage.
- A bailee can insure any article or property that has been bailed. He can be a gratuitous bailee or a bailee for a reward.
- A trustee has an insurable interest under the property placed in his or her care.
The principle of Good Faith in Fire Insurance
The arrangement of fire insurance is one in which the observance of the utmost good faith (uberrima files) by all parties is critical. The highest level of good faith in fire insurance has two components: first, the disclosure of relevant evidence, and second, the protection of the insured property. Both the insurer and the insured must have clear details on the subject matter of the injury. Since he knows something about the subject matter, the insured must honestly and completely reveal all of the details requested.
The insured is therefore expected to reveal any relevant facts that he is aware of even though it was not requested by the insurer; a material truth is one that affects the insurer’s decisions. The decision could be about accepting, declining, or determining the premium.
House design is an example of material reality in the context of fire insurance. If the assured fails to behave in good faith, the contract can be prevented by the other parties. ! It was irrelevant to argue that the insured was unaware of the fact and thus unable to report it. In a given situation, the insured is required to be aware of all relevant evidence.
The insurer must also report any relevant information of which he is aware. The protection of the property is the second step of good faith.
Thus, good faith is required not only during contract negotiations but also during the policy’s duration and when filing claims. Any changes made after the start of the risk must be communicated to the insurer.
The insured or his agents, as well as the insurer, must take all necessary precautions to avoid or minimize damage. Since the insured is close to the house, he must act to avoid fires and, if a fire does occur, he must do everything possible to extinguish it. In such instances, he must behave as though he were uninsured.
Exceptions to the good faith principles:
- The insured is not expected to reveal details in the following situations.
- All of the circumstances that reduce the risk.
- All information is known or fairly believed to be known by the insurer.
- The detail that is well known.
- Those facts that the insurer should have known in the ordinary course of his business or that the insurer should have reasonably inferred from the information provided.
- Certain details are unnecessary to reveal due to a condition or warranty.
Principle of indemnity
The theory of indemnity seeks to compensate the insured for a loss suffered, and the reimbursement should be designed to put him in as close to the same financial condition after the loss as he was before the incident.
The insured does not make a claim in excess of the sum needed to recoup the actual loss.
The insurers agree to make good the insured’s loss by cash reimbursement, reinstatement, or substitution, so that the insured is completely indemnified, but only up to the amount insured. The law forbids any insurance that allows the insured to benefit from the loss of the item lost.
It will reduce the incentive to ruin the insured property in order to protect the capital.
The guaranteed sum is not a measure of indemnity; rather, it establishes a maximum amount up to which the damage can be indemnified. The real sum of indemnity would be the market value of the subject matter lost or injured by fire at the time and location of the fire’s occurrence. It will never go over the guaranteed number.
When the real loss exceeds the guaranteed amount, only the insured sum is charged; nothing else is paid. However, this theory does not apply when the policy is a respected policy.
In this case, the source of indemnity would be the insured value, which was specified in the policy when it was taken, rather than the real cash value of the property at the time of failure. The real loss is not taken into account in a respected policy. In the case of valued policies, the sum of the claim can be greater or less than the real loss at the time of the burn.
Interpretation of Indemnity
The insured is entitled to complete indemnity if the amount guaranteed is adequate.
In reality, however, such perfection can be difficult to achieve.
Previously, the term ‘indemnity’ was interpreted to mean just material indemnity, i.e., tangible and material property.
Intangible losses, such as lost income, rent, and so on, were not paid. It was a significant burden for honest insured people.
The policy is now expanded to cover not just the material loss of the insured property, but also the ‘consequential loss.’
When a commercial property is destroyed by fire, not only is the material loss due to the destruction of the house, plant, and stock protected, but also the consequential loss of income due to the cessation of sales, wages, taxes, rent, prices, and so on.
Nowadays, all tangible and intangible damages are compensated, and consequential damage is often included in the definition of indemnity.
Consequences of Indemnity in Fire Insurance
The following are the implications of the indemnity doctrine:
- Only the sum of the insured’s loss will be claimed.
- In the event of partial harm, the insured can only seek compensation for the amount of damage sustained.
- The insured must assign to the insurer any rights he might have against a third party arising from the loss.
- If the insured has affected more than one scheme, he is not entitled to more than one full indemnity.
- The amount of indemnity varies depending on the type of land.
- The cost of repairing or restoring damaged buildings to their pre-loss state is used to calculate indemnity.
Similarly, for equipment, the calculation of indemnity is the market value, which is determined after depreciation and wear and tear.
The net cost to the insured is the indicator for stock in exchange. Indemnification may take the form of money, repairs, replacement, or reinstatement.
Proximate Cause of Fire Insurance
The rule is that the immediate cause, rather than the remote cause, is to be considered as causa proxima non-remota spectatur. The proximate trigger is important in fire insurance.
The theory of proximate cause has already been thoroughly explored.
When paying a claim, the insurer still considers the proximate cause.
If the insured property is burnt but the fire was caused by an excepted peril, the legal situation is determined by whether the excepted peril was proximate.
When an explosive bomb destroyed the house, the remote cause was enemy action; the proximate cause was enemy action.
Proximate cause is the active efficient cause that initiates a chain of events that results in a result without the interference of any power. It is a powerful, successful, and proximate cause to the exclusion of all other causes that are too distant.
If the loss is due to the insured perils, the insurer is responsible for the loss as a direct and inevitable consequence of the direct causal relationship being formed.
Doctrine of Subrogation
Subrogation refers to the right of one person to act in the place of another and assert the latter’s rights and remedies. Subrogation is merely a corollary to the concept of indemnity.
According to the principle of indemnity, the insured can only know the actual value of the loss or harm to the property, and it follows that if the damaged property has any value left or the guaranteed can reclaim the lost property or has any right against the third party about that property.
These must be forwarded to the insurer.
If the insured is permitted to keep them, he would have known more than the actual loss, which is in violation of the indemnity principle. If the assured wishes, he will sue the third party, and if he recovers damages, the insurer is released from liability.
If the insured has received the full amount of his loss, any amounts gained from a third party are the insurer’s property up to the amount of their disbursement.
At common law, the right to subrogation is exercisable until the insurer has paid the claim made against him.
Warranties in Fire Insurance
The proposal form’s contents are expressly incorporated into the regulation, which forms the warranty.
Warranty is the assurance given by the assured that something specific will be done or will not be done, or that certain conditions will be met, or that he affirms or denies the existence of a certain state of truth.
Warranties that are listed in the policy are referred to as express warranties, whereas those that are not mentioned in the policy are referred to as implied warranties.
Implied warranties
The first implied guarantee is that the property construction is not subpar, for example, a kaccha house should not be made of a wooden roof of thatched leaves, grass, hay, or bamboo cloths, and so on.
A second warranty states that Fire Extinguishing Appliances should be installed with the house.
Annual maintenance is needed.
Silent threats, such as new building additions, should be avoided. The special articles and property that are exposed to fire must be sent to the fire safety senders.
When the policy is affected, the subject matter of insurance must remain and should be known in the event of a loss.
The identification is based on the location, municipal number, surroundings, and a detailed description of the location; a breach of warranty allows the insurer to prevent the claim.
Warranties must be followed literally, and a violation of warranty renders the relevant item of the policy invalid, even though no increase in risk is involved.
Any warranty to which the property insured or any item thereof is or may be made subject shall apply and continue to be in effect from the time the warranty attaches and shall be a bar to any claim in respect of such property or item, whether it raises the risk or not.
The condition specifies that a warranty is attached for the duration of the policy, and if a warranty is not followed during this period, the insured will not entertain any claim for the property or object affected.
However, if the policy is extended and a warranty violation occurred prior to the renewal date rather than after it, and a failure occurs after the renewal is affected, a claim may be made. Failure to comply with a warranty prior to the current renewal period of a policy does not exclude a lawsuit.
Non-compliance with a contract results in the loss of coverage only during the time of policy in which the violation occurred. These are the cases in which insurance concepts are applied in fire insurance.
References
Sites
- Fire Insurance Definition (investopedia.com)
- Fire Insurance: Types, Coverage, Exclusions & Claim Process (policybazaar.com)
- Fire Insurance: Meaning, Procedure and Principles of Fire Insurance (yourarticlelibrary.com)
- Fire Insurance (niilmuniversity.in)
Books
- Law of Insurance – Book by Avtar Singh
- LexisNexis’s Principles of Insurance Law by MN Srinivasan & K. Kannan [2 HB Vols.]
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