What is Fire Insurance?
A fire insurance is an agreement between two parties, i.e., insurer and insured. The insurer undertakes to compensate for the loss or damage suffered by the insured in consideration of the insured paying certain sum called ‘Premium’.
The term ‘fire’ claim must satisfy two conditions:
- There must be actual fire or ignition;
- The fire should be accidental but not incidental. The property must be damaged or burnt by fire.
Features of a Fire Insurance Contract
1. A fire insurance contract is a contract of indemnity. It means the insured can only recover the amount of loss subject to a maximum of the sum assured.
2. The insured person should have insurable interest in the subject-matter of the ‘contract, both at the time of the contract and at the time of loss.
3. A contract of fire insurance covers the risk of loss resulting from fire or any cause which is a proximate cause of such loss.
4. A fire insurance contract is an yearly contract.„It automatically lapses after the expiry of the year, unless it is renewed.
Average Clause in Fire Insurance Policy
To take care of cases of under-insurance, there will be an average clause in fire policy. This means that in case of loss the insured has to bear a part of the loss. The insurer will only bear rateable proportion of the loss. In other words, for the difference between the actual value of subject matter and the amount for which it is insured, the insured has to be his own insurer.
Let us illustrate, suppose.a property worth Rs. 2,00,000 is insured for Rs. 1,50,000 and the fire policy contains the average clause. Now, if half the property is destroyed by fire, the insurer will pay only Rs. 75,000 which is calculated as per the following formula.
Insured amount (Rs.1,50,000) x Actual loss(Rs. 1,00,000) / Actual value of the property(Rs.2,00,000)
If three-fourths of the property is destroyed by fire, the insurer will pay Rs. 1,12,500. The entire amount of policy will become payable only when entire property is destroyed by fire.
Insurable Interest in fire insurance
In case of fire insurance, insurable interest should exist at both times, i.e., while taking policy and also at the time of suffering loss. The following persons have insurable interest in the fire insurance:
- The owner of goods in his own goods.
- The owner of the property in his property.
- The agent in the goods of the principal.
- The trustee in the ‘goods of the trust’.
- The pledger in his pledged goods
- The partner in the assets of the firm.