Types of Fire Insurance In India

A fire insurance policy is a type of contract between an insurance firm and a policyholder in which the insurance provider takes the responsibility of indemnifying the policyholder for any kind of damages and losses resulting from a fire outbreak. In exchange, the policyholder pays a certain amount called the premium to ensure financial protection over a fixed period.

Most fire insurance covers not only damage from fire but also indirect damages from smoke, explosions and damages from firefighting efforts. Certain types of fire insurance policies also cover damages from lightning, riots, strikes, malicious damage, natural disasters, etc., through a comprehensive plan. The premium amount depends on the extent of coverage, policy term, and risks involved.

A fire insurance plan provides financial protection for buildings, furniture, machinery, and personal property. If a fire accident destroys these things, the insurance company compensates the policyholder as per the terms and conditions of the policy. Insurance plans may have different terms for residential, commercial and industrial property.

See Also: Fire Insurance for Commercial Property

A fire insurance plan is a subcategory of property insurance that covers only damages that occur directly or indirectly from a fire-related accident. Here is how it works:

Choosing a Plan: The property owner chooses an insurance plan based on the amount of coverage they need, as per their property’s valuation.

Policy Purchase: Next, the owner buys a fire plan offering the right coverage amount and inclusions by paying the required premium. The policy is the contract between the owner (policyholder) and the company (insurer).

Informing the Insurer:** If the property is damaged, the policyholder must file a claim and provide information about the damage, including photographs and documents like fire reports, identification documents, etc.

Claim Processing: As per the terms, the insurer will compensate the policyholder based on the actual cash value or replacement cost. Before that, they need to verify the authenticity and extent of damage by sending a surveyor to the site.

Claim Settlement: Once all information is verified, the insurance company will pay the policyholder for repair, clearance, rebuilding and refurbishment costs.

Let’s understand how the average fire insurance policy works with an example. A business owner with a shop worth ₹20 lakh and inventories worth ₹40 lakh gets a fire insurance with a sum insured limit of ₹30 lakh. Suppose the policy has an average clause that limits the insurer’s liability in the event of an accident.

Say that a fire breaks out and the shop owner loses ₹60 lakh in total (shop + contents). As the policyholder had enough insurance for only 50% of the total shop value, the insurance company will also bear only 50% of the liabilities. In this case, they would cover a total of ₹30 lakh of the repair and refurbishment costs.

See Also: Principle of Fire Insurance

As mentioned before, there are different types of fire insurance policies available in the market. Make sure to check what coverage amounts, inclusions and exclusions each type brings and if that suits your needs. Here are the types:

Average Policy

This is a fire insurance plan with an average clause, which limits the insurer’s liability proportionately to the property’s market value. This means if your policy covers only 50% of the total value of your office at the time of loss, the insurance company will pay only up to 50% of the damages. You have to pay the rest out of your own pocket.

Valued Policy

Valued fire insurance plans simplify the claim settlement process by stipulating a fixed value of the insured property. During the time of claim, the insurer pays the predetermined amount agreed with the policyholder. This type of fire insurance is useful for rare and high-value items whose prices may fluctuate.

Floating Policy

These policies cover several properties and assets at different locations with a single premium and plan for convenience. The insurer assigns a value to each of the assets to determine the average value of assets for premium calculation. Floating policies are ideal for businesses that have multiple pieces of equipment and inventory at multiple locations, such as warehouses and retail outlets.

Standard Fire and Special Perils (SFSP)

This is a comprehensive fire insurance policy that offers standard fire coverage as well as coverage for a variety of hazards, such as explosions, implosions, and lightning. It’s suitable for property owners who want coverage against natural disasters and accidents with a single policy.

Specific Policy

In this type of policy, the insurer offers a customised sum insured amount after evaluating their risks. The compensation amount is fixed and guaranteed in case of a loss. However, the insurer won’t pay anything extra. Specific policies are best for businesses looking to insure specific high-value items.

Consequential Loss Policy

Also called loss of profit insurance, these plans cover losses suffered indirectly from a fire accident. These plans cover the loss of income during periods of business interruption following the accident, as well as various additional expenses incurred. This type of commercial fire insurance policy ensures that a business can resume its normal operations smoothly.

Excess Policy

This is an additional policy purchased to cover additional risks not covered by the base policy, called the first loss policy. Excess policies are used to insure products whose prices fluctuate constantly. While the first policy covers the minimum stock value, the second policy (excess policy) covers any increase in stock prices. The policyholder must declare the actual values every month to determine the premium amount.

Comprehensive Policy

A comprehensive fire insurance policy offers comprehensive coverage over and above standard and allied plans. Besides fire and allied damages, these plans cover natural disasters, such as earthquakes, tsunamis and hurricanes, as well as riots, strikes, theft, malicious damages, rockslides, landslides, and other risks. Essentially, they provide complete property protection.

Replacement Policy

Many fire insurance policies assign a fixed value to insured assets, which carries the risk of insufficient coverage in the case of an accident. Replacement policies remedy this by guaranteeing the full cost of replacement with the same or a similar product. As a result, you can avoid the effects of depreciation, as the full asset value is covered.

Blanket Policy

This is a category of fire insurance that covers multiple properties and assets under a single policy. It covers both current and fixed assets under a single sum insured. The sum insured amount applies to all assets across all locations. In case of a loss, the compensation amount is determined by the actual damage suffered, subject to the overall limit.

Just like other insurance policies, you can customise your fire insurance policy with optional add-ons or riders to meet your insurance needs. Here are some popular fire insurance add-ons:

• Combustion Cover: This rider adds the coverage of spontaneous combustion and its destructive effects. It's crucial for businesses carrying or storing highly flammable materials or engaging in fermentation.

• Debris Removal Cover: This rider covers the cost of removing debris and garbage from a fire accident over and above the claim amount.

• Impact Damage Cover: It covers impact damage from various sources, such as falling trees, collapsed walls, vehicles, and other unexpected events.

• Earthquake Cover: With this, the insurance covers damage caused directly or indirectly due to earthquakes, landslides and rockslides. It’s an essential cover for businesses in earthquake-prone areas.

• Floater Cover: This allows you to turn your regular plan into a floating fire insurance policy. This lets you cover multiple products across multiple locations, which is especially useful for large businesses.

• **Damage to Stock in Cold Storage: Power outages of over 24 hours can lead to deterioration of sensitive goods held in cold storage. This rider is to cover the cost of the expiry of these products.

• Rent Cover: This rider helps to compensate for rent paid over the period your business remains inoperative as repairs and construction work are carried out. It can also cover rent paid to new/temporary premises.

• Escalation Clause: This rider lets you automatically increase the sum insured amount during the policy term.

• Contamination Cover: It provides coverage of accidental contamination and leakage of hazardous materials and the expenses involved in cleaning up operations.

• Omission to Insure Additions/Alterations: This add-on lets the policyholder add newly built facilities and added stocks to insurance coverage.

In a rapidly urbanising country like India, the importance of fire insurance should not be underestimated. Improper electrical wiring, unsafe cooking areas, violation of building codes and lack of ventilation in buildings are leading causes of fire in both residential and commercial areas. This can result in significant damage to both property and people.

The destructive nature of fire sets it apart from other accidents. Rapidly spreading fire can quickly spread across buildings, causing massive losses in a short time. For businesses, fire accidents can destroy buildings, raw materials, products, equipment, tools, furniture, and fixtures, among other things. In addition, liabilities from injured employees and third parties can also add up, leading to an inevitable bankruptcy.

Having fire insurance is crucial if you want financial protection from the devastating impacts of fire-related accidents. These plans cover everything from the replacement of assets and repair costs to loss of income and rent costs, depending on the type of fire insurance. Moreover, fire insurance plans are required for compliance reasons for certain types of businesses.

See Also: Features & Benefits of Fire Insurance

Different types of fire insurance plans have different coverage options, depending on their premium amount. Here are some common inclusions of fire policies:

Loss from Fire: It covers physical damage and losses caused by a fire accident.

Repair and Reconstruction: Most plans cover repair, reconstruction and replacement costs up to the sum insured amount.

Explosion/Implosion: Facilities containing gas cylinders, boilers, fermentation tanks and flammable materials can suffer explosions or implosions.

Lightning: Most plans cover fire damage from lightning, including damage to walls, roofs and other structures.

Movable Assets: Most plans cover movable assets, such as furniture, fixtures, tools, machinery, etc.

Firefighting Services: Fire insurance policies may cover firefighting expenses as well as water damage caused by sprinklers and hoses.

Riots and Malicious Damage: Comprehensive plans cover man-made damage from riots, strikes and intentional damage.

Temporary Accommodation: If your property is unusable, the plan may cover temporary accommodation costs.

Natural Calamity: Some types of fire insurance plans cover damages caused by natural calamities, such as earthquakes, storms, cyclones, floods, and tsunamis.

Liability Coverage: Some plans or riders may offer compensation to third parties to prevent legal actions.

In most cases, fire insurance policies do not offer coverage for the following scenarios, unless specifically mentioned or added using a rider:

• Missing or misidentified property

• Damage to unoccupied or abandoned property

• Electrical leak or damaged electrical machines

• Loss due to nuclear risks

• Risks such as wars, foreign invasions, war-like acts

• Damage due to willful negligence or intentional acts

• Spontaneous combustion

• Losses due to contamination or pollution

• Underground fires

• Fire by order of the public authorities

Fire insurance can be purchased by anyone who is exposed to the risk of fire outbreaks. Some of the suitable candidates for fire insurance are:

• Business Owners

• Any institution/organisation/firm exposed to the risk of loss due to fire accidents.

• Manufacturing firms

• Warehouse owners

• Hospitals

• Hotels and Lodging Centres

• Transporter

• Shop Owners

• Residential Property Owners

• Educational institutions

• Banks and other financial institutions

There are many different types of fire insurance plans in India designed to align with the varied requirements of the policyholders. While each policy comes with different features and benefits, all of them serve a common purpose - protecting the policyholders from potential losses. So, examine your risks, outline your requirements, and buy a suitable fire insurance policy.

If you are looking for comprehensive coverage against fire and other calamities, check the TATA AIG website for our selection of insurance products. For office-based businesses, the TATA AIG Office Insurance is the ideal choice for an all-in-one insurance plan covering fire, earthquakes, thefts, robberies, riots, strikes and other risks. Get it for easy and quick claim settlement.