Kinds of Fire Insurance Policies

7 Kinds of Fire Insurance Policies

By RC Agarwal

There are a number of fire insurance policies to suit different interests. A number of factors are considered before deciding about the kinds of policies to be taken.
These factors are:
1. The type of risk involved.
2. The nature of the property to be insured.
3. The contents of the property.
4. Occupancy hazards.
5. Exposure hazards.
6. The time element.
The following kinds of policies are generally issued for fire insurance:

1. Valued Policy:

In this policy the value of the subject-matter is agreed upon at the time of taking up the policy. The insurer agrees to pay a pre-determined amount if the subject-matter is destroyed or damaged by fire. The principle of indemnity is not applicable to this policy. The agreed value may be more or less than the market value at the time of loss. These policies are generally issued for those goods or property whose value cannot be determined after their loss or damage. These goods may include works of art, jewellery, paintings, etc.

2. Specific Policy:

Under this policy the risk is insured for a specific sum. In case of loss of property, the insurer will pay the loss if it is less than the specified amount. 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:

If the ‘average clause’ is applicable to a policy, it is called Average Policy. Average clause is added to penalise the insured for taking up a policy for a lesser sum than the value of the property. The compensation payable is proportionately reduced if the value of the policy is less than the value of the property.
Suppose a person takes up a fire insurance policy of Rs. 20,000 and the value of the property is Rs. 30,000. If there is a loss of property worth Rs. 50,000, the underwriter pays compensation of Rs. 10,000 (20,000/30,000 x 15,000) and not Rs. 15,000. It discourages the insured to get under-valued policy.

4. Floating Policy:

A floating policy is taken up to cover the risk of goods lying at different places. The goods should belong to the same person and one policy will cover the risk of all these goods. This policy is useful to those businessmen who are engaged in import and export of goods and the goods lie in warehouses at different places. The premium charged is generally the average of the premium that would have been paid, if specific policies would have been taken for all these goods. Average clause always applies to these policies.

5. Comprehensive Policy:

A policy may be taken up to cover up all types of risks, including fire. A policy may be issued to cover risk like fire, explosion, lightening, burglary, riots, labour disturbances etc. This is called a comprehensive policy or all risk policy.

6. Consequential Loss Policy:

Fire may dislocate work in the factory. Production may go down while the fixed expenses continue at the same rate. A policy may be taken up to cover up consequential loss or loss of profits. The loss of profits is calculated on the basis of loss of sales. A separate policy may be taken up for standing charges also.

7. Replacement Policy:

The underwriter provides compensation on the basis of market price of the property. The amount of compensation is calculated after taking into account the amount of depreciation. A replacement policy provides that compensation will be according to the replacement price. The new asset should be similar to the one which has been lost. The amount of compensation will depend upon the market price of the new assets so that it is replaced without additional cost to the insured.