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Principles Of Fire Insurance Policy

  • Author :
  • TATA AIG Team
  • Last Updated On :
  • 25/05/2024
  • 2 min read

In a world full of uncertainties, protecting your valuable assets is of immense importance. Fire is an unanticipated and devastating force that can spread quickly and destroy property. It is a potential threat to business owners, homeowners, and individuals. A fire insurance policy emerges as a saviour in these situations.

The fire insurance policy is a specialised form of property insurance that protects individuals and organisations against the losses incurred due to fire outbreaks.

This article looks into the fundamental principles of fire insurance for a better understanding of its importance and how it works.

What is Fire Insurance?

Fire insurance is an agreement to compensate the insured for the loss suffered by the destruction from fire. It plays an essential role in safeguarding individuals and businesses from financial burdens.

A fire insurance policy, also called a Standard Fire and Special Perils insurance policy (SFSP), has a predetermined premium. The insurer compensates the insured for losses up to a sum insured only. The coverage includes the costs to repair or replace the damaged assets.

The Importance of Fire Insurance for Business Owners

Business owners must invest in fire insurance for the following reasons:

Fire is Unpredictable and Destructive

A fire can arise unexpectedly and spread rapidly, leading to significant damage. Not having appropriate fire insurance policy coverage can make individuals and businesses face crippling financial losses.

Financial Protection

With fire insurance, you’ll have a safety net to fall back on in case your property suffers damage or losses due to fire-related incidents. The coverage extends to the costs of rebuilding, repairing, and replacing the damaged property and its assets.

Legal and Regulatory Requirements

In some jurisdictions, it is mandatory to have fire insurance coverage, particularly for businesses dealing with hazardous materials.

What are the Principles of Fire Insurance?

The principles of fire insurance build a solid framework to promote accountability, fairness, and effective risk management. The different clauses and adjustments guarantee adequate coverage to policyholders, keeping their investments secure.

Principle of Insurable Interest

The policyholder is eligible for coverage only if they have a financial stake in the property and its contents. In other words, the policyholder must have an insurable interest in the insured property.

An insurable interest ensures that the policyholder is affected financially if there is any damage or loss caused to the insured property. This principle does not let individuals take insurance policies on properties they do not own or have a stake in, reducing the likelihood of fraudulent claims.

Example:: Rahul Verma runs an electronic store in Mumbai. He has a fire insurance policy. Since any damage to the goods in the store will affect Rahul financially, he has an insurable interest, and the insurer will provide coverage for goods damaged by fire.

But, if he plans to sell the store or shut down operations, he must notify the insurance company to terminate the policy.

Principle of Utmost Good Faith

This principle makes it essential for the policyholder to disclose all pertinent information about the property and its condition. The principle is also known as Uberrimae Fidei. If the policyholder does not provide correct details or hides facts, it can make the policy void.

Example:: Arjun Kalia reached out to an insurance company to buy fire insurance for his business. It is Arjun’s responsibility to share accurate details of the property with the insurer.

These details include the location, estimated value, potential perils, etc. In return, the insurer must provide all policy conditions with transparency.

Principle of Indemnity

This principle of fire insurance highlights that the purpose of the policy is to protect the policyholder from losses and not generate a means of profiting from it. So, if your property suffers damages due to a fire, you will be compensated for the actual loss suffered up to the sum assured mentioned in the policy.

The principle focuses on restoring the insured to the same financial position as they were before the fire incident, eliminating any chance of profiting from it.

Example:: Indus Constructions Ltd. has protected its workshop’s assets under a fire insurance policy. Two months ago, a fire at the workshop damaged assets costing ₹1 lakh.

Indus Constructions Ltd. raised a claim to its insurance company, which reimbursed an amount of ₹1 lakh only to the insured.

Principle of Proximate Cause

The principle of proximate cause is one of the fundamental principles of fire insurance. It determines if a loss or damage is eligible for coverage under the insurance policy. It focuses on determining the cause of damage and whether the cause falls under the scope of coverage.

In certain cases, there may be two or more perils, operating one after the other or simultaneously contributing to the loss. Here, it is essential to identify the proximate cause, which is the dominant factor responsible for the loss.

The insurance company settles the claim when the proximate cause is covered under the perils mentioned in the fire insurance policy. The insurance company can reject the claim if the fire results from a non-covered peril.

Example:: A jungle fire near S.K. Paper Mills caused a minor explosion at the business property, damaging its plant and machinery. Fortunately, S.K. Paper Mills had a fire insurance policy.

It reached out to its insurer, who identified the proximate cause of damage as a fire. The insurer settled the claim because the fire was caused by an insured peril.

Principle of Subrogation

The principle of subrogation allows the insurer to pursue legal action against a negligent third party after paying losses to the insured.

So, when an insurance company settles the fire insurance claim for the policyholder, it can step into the policyholder’s shoes and recover losses from the third parties responsible for causing the fire or contributing to the loss. However, the principle applies after claim settlement only.

Example:: Due to a fire at the warehouse of Anil Sharma, timber costing ₹3 lakh kept for building furniture was damaged. When Anil Sharma filed for an insurance claim, the insurer settled the claim amount.

The principle of subrogation allows the insurer to take legal rights of the burnt timber, convert it to coal, and sell it to recover losses.

Principle of Contribution

When more than one insurance policy covers a property against fire, the principle of contribution applies. In this case, the fire insurance provider settles the claim on a pro-rata basis, which means each insurer pays a proportionate share of the loss.

The objective of the principle is to ensure that the policyholder does not receive compensation exceeding the actual loss incurred. The principle does not let the policyholder earn a profit by insuring the same assets under several fire insurance policies.

The principle of contribution applies when the following conditions are fulfilled.

The fire insurance policies cover the same property.

The insured is the same.

The policies cover the risks leading to the loss.

The policies are valid and active.

Example:: A fire erupts at the factory of Mohanlal Corporation, damaging inventory worth ₹2.5 lakh. The company has fire insurance from ABC Insurance and XYZ Co. The insured files a claim with both insurers.

ABC Insurance and XYZ Co. verify the claim, estimate the losses incurred due to the fire and pay portions of the losses. ABC Insurance reimburses ₹1 lakh, and XYZ Co. reimburses ₹1.5 lakh, respectively, depending on their sum insured limits. They do not pay ₹2.5 lakh each.

The Bottom Line

Investing in a fire insurance policy is crucial. It helps to extinguish the financial flames a fire can spark. Besides, it enables businesses to resume operations a lot sooner by taking care of the financial costs of repair and replacement.

Learning about the principles of fire insurance helps to establish a transparent and mutually beneficial relationship between the policyholders and the insurer. The concepts are the cornerstones of equitable and effective fire insurance policy coverage in a world where property values and rebuilding costs fluctuate remarkably.

Tata AIG offers an SME insurance policy to secure businesses and customers in many ways. The fire & burglary insurance plans provide a reliable safety net against the unpredictable threat of fire-related incidents. The policy not only provides security to assets but also gives peace of mind by preparing the policyholder for the unanticipated challenges that can come in the way.


What are the fundamental principles of fire insurance?

The primary principles of fire insurance include the principle of insurable interest, the principle of utmost good faith, the principle of indemnity, the principle of proximate cause, the principle of subrogation, and the principle of contribution.

How is the premium of a fire insurance policy calculated?

The factors considered to determine fire insurance premiums are the property’s sum insured, risk occupancy and location, perils to be covered, and add-on covers chosen by the policyholder.

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Disclaimer / TnC

Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.

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