FIRE
INSURANCE: A LEGAL AND COMMERCIAL ANALYSIS
Synopsis
6.
Perils Covered Under Fire Insurance
9.
Related Law and Acts
Introduction
Fire
insurance is an important branch of general insurance that provides financial
protection against loss or damage caused by fire. In today’s world, where
buildings, factories, and homes are increasingly exposed to fire risks due to
electrical faults, industrial activities, and natural causes, having fire
insurance has become essential. It helps individuals and businesses recover
from financial losses by offering compensation when fire damages insured
property. Fire insurance works through a legal contract between the insurer and
the insured.
Definition
Fire
insurance is defined as a contract of indemnity under the Indian
Contract Act, 1872, the Insurance Act, 1938, and regulated by the Insurance
Regulatory and Development Authority of India (IRDAI). In a fire insurance
contract, the insurer undertakes to indemnify the insured for any loss or
damage caused to property by fire, in exchange for a premium. Section 2(6A) of
the Insurance Act, 1938 classifies fire insurance as a form of general
insurance. The Fire insurance contract must fulfil all the essentials of a
valid contract under the Indian Contract Act, 1872, including lawful
consideration, mutual consent, and a lawful object.
The contract of Fine Insurance is an agreement between
the insurer and insured to pay sum premium for the losses held due to fire.
And
the insured must have an insurable interest in the subject matter,
financial relationship that would result in loss if the property were damaged.
The principle of uberrima fides (utmost good faith) also applies,
requiring full disclosure of material facts by the insured.
History and Development
Ø The
Great Fire of London:
The
modern system of fire insurance began after the Great Fire of London in 1666,
which destroyed over 13,000 houses and caused immense economic loss. Then, Nicholas
Barbon, an English economist and builder, established the first fire
insurance company, the "Fire Office", in 1680, marking the
formal birth of fire insurance as a business model.
Ø 18th
Century:
In
the 18th century, fire insurance expanded across Europe, especially in England
and Germany. Private fire insurance companies and mutual societies were
established, offering coverage for homes and businesses.
Ø 19th
Century:
In
the 19th century, fire insurance developed globally due to industrial growth
and urbanization. Triton Insurance Company was established in 1850 in
Calcutta, marking the start of formal fire insurance services in the India.
Ø In
India:
Fire
insurance was introduced in India during the British colonial period. The first
fire insurance company in India was the Triton Insurance Company,
established in 1850 in Calcutta. Which is controlled by the British
interests.
Nature and Scope
Ø Contract
of Indemnity:
Fire
insurance is a contract of indemnity, meaning the insured is compensated
only to the extent of the loss suffered, not for profit.
Ø Insurable
Interest:
Insurable
interest means the insured must have a financial interest in the
property and would suffer a loss if it is damaged by fire. It must exist
at the time of the loss.
Ø Doctrine
of Uberrima Fides in Fire Insurance (Good Faith):
The
utmost good faith consists of two parties must disclosure of material
facts and preservation of the property insured.
Ø Protective
in Nature:
The
Fire Insurance offers financial security and encourages fire safety and
risk mitigation.
Ø Subrogation:
If
a fire is caused by a third party and the insurer pays the claim to the
insured, the insurer can sue the third party to recover that amount.
Ø Proximate
Cause:
Proximate cause means the main
and direct reason for the loss or damage. In fire insurance, the company
will pay the claim only if fire is the main cause of the damage.
Insurable
Interest
Insurable
interest is a legal requirement in any fire insurance policy. It means the
insured must have a financial or other interest in the subject matter of
insurance such that he will suffer a loss if the insured property is damaged or
destroyed by fire. This interest must exist:
Ø At
the time of contract formation.
Ø At
the time of loss.
Perils
Covered Under Fire Insurance
Ø Fire:
Damage caused by accidental fire, not by one’s own willful act or negligence.
Ø Lightning:
Damage
due to lightning strikes, including resulting fires or explosions.
Ø Explosion/Implosion:
Covers
damage caused by sudden bursting (explosion) or collapse (implosion) of
appliances or containers (except for boilers unless specifically included).
Ø Bursting:
Damage
due to accidental bursting or leakage of plumbing or water tanks.
Ø Act of nature:
Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado,
and Flood Damage caused by natural disasters involving water and wind.
Kinds
of Fire Policies
Fire
insurance policies come in various forms depending on the needs of the insured.
Common types include:
Ø Valued
Policy:
In fire insurance,
a valued policy means the value of the item is decided in advance when taking
the policy. If the item is destroyed by fire, the insurance company pays
that fixed amount, not the current market value.
Ø Specific
Policy:
Covers a specified
property for a fixed amount, regardless of the actual value of the loss.
Ø Floating
Policy:
A floating policy
in fire insurance covers goods kept at different places under one single
policy. It is useful for businesses that store stock in multiple locations like
warehouses or branches. The total sum insured is shared across all locations,
making it cost-effective and convenient.
Ø Comprehensive
Policy:
A comprehensive
policy in fire insurance provides wider coverage. Along with fire, it also
covers other risks like burglary, theft, explosion, lightning, natural
disasters, and accidental damage. It is useful for those who want all-round
protection for their property under one policy.
Ø Open
Policy:
In fire insurance, an open
policy is used when the value of goods keeps changing. The insured declares
the value each time, and the insurer pays based on that declared value if a
fire happens. It is mainly used by businesses with regular stock movement.
Principles
Under Fire Insurance
Ø Utmost
Good Faith (Uberrimae Fidei)
The utmost good
faith consists of two parties must disclosure of material facts and
preservation of the property insured.
Ø Insurable
Interest
As
discussed above, the insured must have a stake in the insured property.
Ø Indemnity
The
insured is compensated for the actual loss suffered.
Ø Subrogation
After
compensation, the insurer obtains the right to recover from third parties
responsible for the loss.
Ø Contribution
If
the insured has multiple policies, each insurer contributes proportionately to
the loss.
Ø Proximate
Cause
The
dominant and most effective cause of the loss must be fire or a covered peril
under the policy.
Related Law and Acts:
1)
The Indian Contract Act, 1872
2)
The Insurance Act, 1938
3)
The General Insurance Business
(Nationalisation) Act, 1972
4)
The Insurance Regulatory and Development
Authority of India (IRDAI) Act, 1999
Case
Laws
i.
National Insurance Co. Ltd. v. Hanuman Prasad (2001)
The
Supreme Court held that when fire damage is genuine and policy conditions are
satisfied, compensation must be awarded.
ii.
United India Insurance Co. Ltd. v. M.K.J. Corporation (1996)
Clarified
that delay in reporting or lodging a claim can lead to denial, reinforcing the
principle of utmost good faith.
Conclusion
Fire
insurance is an essential legal and financial tool that protects individuals
and businesses from losses caused by fire. It works on key principles like indemnity,
insurable interest, and utmost good faith, ensuring fair
compensation. With different types of policies, it suits various needs and is
supported by strong legal frameworks and case laws.