F.Y. B.

Com (Sem-II)
Elements of Banking & Insurance
Asst. Prof. Dr. Richu Juneja
SDJ International College
 Introduction

The fire insurance may be defined as a contract by which the insurer agrees to
cover any loss suffered by the insured through damage of properties by fire up
to the sum assured in consideration of payment called premium. The contract
of fire insurance is expressed in a document known as a Policy.
The conditions in fire insurance may be of varied nature, but the standard form
of policy includes several conditions which are common to most of the fire
policies. On the back side of the fire policy or after the documentary contents
of the policy, the conditions are given in printed form. The fire insurance
contract, principle and practice are governed by the conditions contained in the
policy.
 Some General Concepts

➢ The term of fire insurance policy is usually one year, and the policy is known
as an “Annual Fire Policy”.
➢ Policy is renewed every year by paying of a fresh premium.
➢ Usually the policy is not cancelled during the term of the policy except that
there is a breach of condition of evidence.
➢ If the same subject matter is issued with more than one insurer, he cannot
realize more than the actual loss from all the insurers.
➢ The original company must disclose all the material facts to the reinsurer. At
the time of loss the reinsurer indemnifies the loss up to the amount of
reinsurance.
➢ Fire insurance business is governed by the tariffs formulated by the Tariff
Advisory Committee, which is a statutory body established under the
provisions of the Insurance (Amendment) Act 1968 to control and regulate the
rates, advantages, terms and conditions that may be offered by insurers in
respect of general insurance business. The tariffs provide rates of premiums
for almost all clauses of risks.
 Essential Conditions for Transfer of Interest

➢ If someone wants to transfer fire policy to other he has to endorse the policy.
➢ When policy is assigned at that time assignor should have insurable interest.
➢ If the property is sold then there will be end of interest of the insured, and the
policy cannot be transferred to other’s name by the insured.
➢ Policy can be assigned to only that individual who has insurable interest.
➢ When policy is assigned in favour of any individual legally, then the assignee
gets all the rights of insured and then he can also sue for the claim.
 Conditions for Cancellation of Policy

➢ When there is a breach of the principle of the evidence of prestige.

➢ When the premium is not paid on due date.
➢ When the claim is demanded after setting the insured subject matter on fire.
➢ When the false claim is demanded.
➢ When the unnecessary hindrances are created in the proceedings of the
company after the loss of the subject matter in fire.
 Types of Fire Insurance Policies

1. Valued Policy
2. Specific Policy
3. Average Policy
4. Floating Policy
5. Comprehensive Policy
6. Blanket Policy
7. Consequential Loss Policy
8. Declaration Policy
9. Adjustable Policy
10. Reinstatement Policy or Replacement Policy
11. Excess Policy
12. Maximum Value with Discount Policy
13. Collective Policy
14. Sprinkler Leakage Policy
15. Transit Policy
16. Rent Policy
17. Building in course of Construction Policy
 1. Valued Policy

• Under this policy, the amount payable in case of total or partial loss of the
property insured is agreed upon at the time of insurance.
• In other words, a fixed amount as agreed upon becomes payable irrespective
of the amount of loss or damage or market value of the property lost.
• Here the principle of indemnity does not apply because of the fact that the
market value of the property lost is not taken into account at the time of loss.
• Such policies are usually taken on special works of art, costly jewelry etc.
where the value of damage of such articles cannot be easily ascertained at the
time of loss.
• The valued policy is beneficial to the insured because he is relieved of proving
the value of the property at the time of loss by searching of invoices and
receipts.
• The disadvantage is that the new purchases and replacement cannot be added
to the valued policy. The valuation, therefore is revised at frequent intervals.
 2. Specific Policy

• Where a specific sum is insured upon a specified property in case of specified

period, the whole of the actual loss is payable provided it does not exceed the
insured amount.
• Here the value of property insured has no relevance in arriving at the measure
of indemnity in a specified policy and the insured sum sets a limit up to
which the loss can be made good.
It can be explained with an example: An insurance policy is taken for Rs.
50,000 and the value of the property is Rs. 80,000. If the property worth Rs.
40,000 is lost, the insured will get the whole amount of loss. If the loss is up to
Rs. 50,000, it will be paid in full. In case loss exceeds Rs. 50,000, say it is Rs.
60,000, the indemnity will only be upto the amount insured i.e. Rs. 50,000.

• Under this policy the insured is not punished for getting a policy for lesser
sum. The actual value of property is not taken into consideration.
 3. Average Policy
The policy which contains the ‘Average clause’ is called Average policy, and claim
is settled according to the value of the subject matter insured. Under average policy
if the property is insured for lesser amount than the actual value, the insured will be
his own insurer for the amount of under-insurance and in the event of loss
proportionate claim is reduced.
As for example, the property worth Rs.60,000 is insured only for Rs.40,000 and the
loss caused by fire is Rs.24,000. There is an average clause in the policy.
The insurer will pay:
𝐈𝐧𝐬𝐮𝐫𝐞𝐝 𝐯𝐚𝐥𝐮𝐞 𝐚𝐦𝐨𝐮𝐧𝐭 ∗ 𝐀𝐜𝐭𝐮𝐚𝐥 𝐥𝐨𝐬𝐬
Claim=
𝐕𝐚𝐥𝐮𝐞 𝐨𝐟 𝐭𝐡𝐞 𝐩𝐫𝐨𝐩𝐞𝐭𝐲

𝟒𝟎,𝟎𝟎𝟎 ∗𝟐𝟒,𝟎𝟎𝟎
The amount of claim to be paid by the insurer will be = Rs.16,000.
𝟔𝟎,𝟎𝟎𝟎𝟎
The insurer will pay only Rs.16,000 and the balance Rs.8,000 is to be borne by the
insured himself.
The average clause comes only when there is an under insurance. If the insurance is
taken for the full value, the clause becomes inoperative because in that case insurer
will settle the full claim.
 4. Floating Policy
A floating policy covers loss on goods which are lying in different places.
Example, A manufacturer of some items may take out one floating policy, instead
of individually separated specific policies for all his goods, some of which may be
in warehouses, others godown at port or railway stations, show room counters etc.
This policy is useful when the insured is in a position to declare only the total value
at risk and not separate values in separate risks.
Since the subject matters are spread over various places and in different forms, the
physical and moral hazards are also varying. Hence, it makes very difficult to
determine premium rates. In India, the premium rate is approximately the same in
such case except the case of most hazardous risk.
The average rate of premium is ascertained by taking into account, the total
premium payable, had the property been insured by specific policies.
 5. Comprehensive Policy

This comprehensive policy undertakes full protection not only against the risk of
fire but other risks such as burglary, theft, riot and civil commotion, damage from
pest, lightning, flood, earthquake, whirl wind, etc. The policy is also termed as
“All Insurance Policy”. However, comprehensive policy does not mean to cover
each and every risk. There are certain exclusions and limitations also.
 6. Blanket Policy

• Blanket policy is issued to cover several different properties or all assets

fixed as well as current of the insured under one insurance.
• In other words, it is a policy which cover one or more than one type of
property in one location or several locations. This policy is considered to
be an extension of the floating policy.
 7. Consequential Loss Policy

• This policy provides protection not only against fire loss but also includes loss
of profit due to stoppage of work in the factory.
• When there is a fire loss it may result not only to the damage of property or to
plant and machinery but there is reduction in business activities which results
in the reduction of net profit also.
• The standing charges such as rent, rates, taxes and salaries, etc. remain burden
on the business till it is re-started.
• The consequential loss policy therefore protect the insured not only for fire but
against such losses also.
 8. Declaration Policy
• The declaration policy will give a better protection in such cases where stock
belongs to wholesalers, distributors, etc. are subject to frequent fluctuations in
value or in volume. In order to provide cover in such stocks a special policy
called “Declaration policy” has been designed.
• Under the declaration policy, the insured takes out insurance for the maximum
amount that he considers would be at risk during the period of the policy.
• On a fixed date of every month or a specific period, the insured furnishes a
declaration of the amount. The premium is provisionally paid to 75% of the
annual premium amount.
• Practically; the annual premium is determined on the average of these
declarations, If the premium is higher than the provisional premium already
paid, the insured has to pay the difference to the insurer. On the other hand, if
the premium so calculated is lesser than the premium already paid, the excess
is returned to the policyholder.
• The great advantage of this policy is that the premium is limited to the actual
amount at risk, irrespective of the sum insured. Premium is adjusted at the
expiry of policy.
 9. Adjustable Policy

• Adjustable policy is an ordinary policy on the stock of the businessman

with liberty to the insured to vary at his opinion. The premium is adjustable
relevant to the variation of the stock.
• The adjustable policy is granted to remove the disadvantage of declaration
on policy. This policy is issued for a fixed term on the existing stock.
• The premium is calculated in the ordinary way and is paid in a single
premium made in the beginning of the policy.
• Whenever there is a variation in stock, the insured informs the insurer. As
soon as the information of variation is received, the policy is suitably
endorsed and the premium is adjusted on a pro-rata basis. The policy sum
in this way changes from time to time.
10. Replacement or Re-instatement Policy

Under this policy insurer undertakes to reinstate the insured property after the
happening of the loss, as for example, property caused by fire is replaced,
irrespective of its value at the time of loss. This represent the actual principle of
indemnity. The policy is also called as “New for Old” because old property is
replaced by new. The policy is issued only for buildings and plant and machinery
and not for stock or materials.
In other policies where there is fire, in case of building or plant and machinery the
loss is determined subject to deduction of depreciation from original cost.
Therefore the amount will be lesser and in order to provide full cover
reinstatement policy is introduced. Thus under this policy, settlement is made on
re-building the premises or replacement of new plant and machinery in place of
old one.
 11. Excess Policy
This policy is a combination of floating as well as average policy. Under the
floating policy the stock of businessman fluctuate from time to time. If he takes
the policy for higher amount he is to pay higher premium. On the other hand, if
he insures for lower amount, he will have to bear a proportionate of the loss. The
insured in this circumstance takes two policies:
i. First loss policy
ii. Excess policy

The first loss policy will cover the minimum level of stock and the excess policy
other will cover the stock which exceeds the minimum limit. The actual value of
the stock in excess is declared every month and premium is charged on average
monthly excess amount.
12. Maximum Value with Discount Policy

• Under this policy, no declaration or adjustment of policy is required, but the

policy is taken for a maximum amount and full premium for the year is
paid thereon.
• At the end of the year, in case of no loss, one-third of the premium paid is
returned to the policyholder.
• This policy avoids the botherations of declaring and recording procedures
of declaration policy.
• It serves as a rough and ready method of coverage for the maximum
amount. This policy is not issued on all types of commodities and is
confined only to selected commodities.
 13. Collective Policy or Fleet Policy

• This collective policy is sometimes issued for convenience.

• A business man takes different fire insurances from various insurance
companies for his own property. At that time he has to pay premiums to each
individual insurer company. Also he has to approach each company for
necessary changes or amendments in individual policy.
• But this policy helps the insured in avoiding the wastage of time and money in
approaching all the companies. Under this policy only one company takes the
responsibility to receive the premiums and amendments on behalf of the
remaining companies.
• Still then the liabilities of the risks lie with the companies individually as per
their shares. In short, this policy helps the insured for taking different policies
from different companies speedily and economically under a single head
known as “Collective Policy”.
 14. Sprinkler Leakage Policy

This policy provides protection to the subject matter due to water accidentally
discharged or leaking from automatic sprinkler installation in the insured
premises. However, the discharge or leakage of water due to heat caused by fire,
repair or alteration of building or sprinkler installation, earthquake, war, explosion
are not covered under this policy.

15. Transit Policy

A transit policy covers goods in transporting from one place to another by rail,
road, air or sea. The risk is commenced with the loading of goods on rail or motor
truck and terminates as they are unloaded from the motor truck or at the railway
station. Only the transit risk caused by fire is covered under this policy.
 16. Rent Policy

A rent policy is a policy which protect the building owners against

the loss of rent. In the event that a tenant does not pay rent because
of fire, the insurance company will pay such loss.

17. Building in Course of Construction

Policy
The policy covers the loss or damage caused by fire to buildings
including machinery and equipment while they are in course of
construction. The policy is useful for the contractors who have
taken a contract to construct a huge building, township or a colony.
 Implied Conditions of Fire Insurance

1. Existence of property:
The subject matter of insurance should exist when the policy is effected.

2. Insured property:
When the fire occurs the claim for the loss of the property is valid if it is
insured.

3. Insurable interest:
The insured must have insurable interest from the commencement of the
risk up to the completion of the contract.

4. Good faith:
The insured must observe good faith towards the insurer. He must disclose
all the material facts fully and truly and should try to prevent the fire and
make all possible efforts to extinguish the fire as if the subject matter is not
insured.
 Implied Conditions Continued….

5. Identity:
The subject matter of insurance should be described in the policy as to
identify it clearly and so define the risk which insurers have undertaken.
 Express Conditions of Fire Insurance

1. Misdescription:
As per this condition no false description or statement be made. If it is so
then the policy becomes void and no claim would be paid.

2. Alteration:
Usually, no alteration is entertained in the fire policy unless the insurer and
the insured have mutually agreed upon. The alteration may be of the
following types:
Removal, change of interest and increase in risk.

3. Exclusions:
The risks which are excluded from the policies are called exclusions or
exceptions. The exclusions are:
Excluded losses, excluded perils and excluded subject matters.
 Express Conditions Continued…

4. Fraud:
Fraud always invalidates the fire insurance contract. The provision regarding
clause clarifies that the fraud would forfeit all the benefits under the policy.

5. Claim:
The insurer should be informed immediately about the loss occurred due to
fire. As soon as the claim intimation is received by the insurer, the company
officials investigate about the loss. After investigation, all relevant procedure
is completed and the claim is then paid.

6. Reinstate Clause
The policy provides the insurer’s liability to pay either in cash or to re-instate
the property. The re-instatement is at the option of the insurer.
 Express Conditions Continued…

7. Insurer’s right after a fire:

When there is a fire the insurer has the rights as given below:
i. He can enter the premises.
ii. He can take possession of the insured property.
iii. He can salvage the insured property.
iv. He can sell the property on behalf of the insured.

8. Subrogation:
Under this condition, the insurer shall obtain all the rights against the third party
which the insured has. The insurer shall act himself as if he is the insured.

9. Warranties
The compliance with warranties is very essential. Non-compliance with any of
the warranties, or even substantial compliance is fatal to the fire insurance
contract, whether the risk thereby has increased or not.
 Express Conditions Continued…

10. Arbitration:
Under the event of any dispute between the insured and the insurer regarding
the settlement of the claim, the dispute shall be referred to the arbitration who
is appointed by the consent of both the parties and the decision taken by the
arbitrator is considered to be final unless there is any legal interpretation
required from the court of law.

11. Purchaser’s interest clause:

This clause is useful to the vendor and purchaser up to the date of completion
of the sale for their respective interests.

12. Loss procedure

To claim the loss of damage insured is required to fill up a form and return it
to the insurer duly signed. If the insurer finds claim form correct in all aspects,
he issues the claim money all at once.
 Express Conditions Continued…

13. Contribution and Average:

If the policy holder possesses more than one fire policy for the same
property with more than one insurer, then such insurers are jointly liable for
the assessed loss and share individually for the insured amount. Their
individual share shall be computed proportionately.

The average clause is meant to penalize the insured for under insurance of
the property. Under the average clause, the amount payable by the insurer is
reduced by the percentage. The average loss to be indemnified by the
insurer is calculated by using the following formula:

𝐀𝐦𝐨𝐮𝐧𝐭 𝐨𝐟 𝐈𝐧𝐬𝐮𝐫𝐚𝐧𝐜𝐞
Compensation = Loss *
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐏𝐫𝐨𝐩𝐞𝐫𝐭𝐲