General Insurance

UNIT 9 PROPERTY INSURANCE

Objectives

The unit will give you a complete knowledge about:

 a sound conceptual framework on Fire Insurance, its principles and practice
 domain knowledge on Fire Insurance coverage and processes
 benefits and costs of Fire Insurance from customers’ viewpoint
 orient the learner towards industry-readiness
Structure
9.1 Introduction
9.2 Fire Insurance and Property Insurance
9.3 Principles of Insurance: as Applicable to Fire Insurance
9.4 Products: Range of Covers
9.5 Processes: Fire Insurance Business and Operations
9.6 Summary
9.7 Keywords
9.8 Self-Assessment Questions
9.9 Further Readings

9.1 INTRODUCTION
A few casual glances at news papers or television news over period of time, may
reveal the outbreak of fires and the resultant losses of lives and damage to property,
particularly in urban areas. Fire could lead to losses of assets (e.g., buildings, machinery,
equipment, goods etc.). Losses of significant magnitude may have a crippling financial
impact, either permanently or until normalcy is restored. In the absence of appropriate
Fire Insurance policies, losses are regrettably borne by the owners themselves (resulting
in capital erosion) or lead to bad debts for the lending banks. In the daily hustle and
bustle of business, due attention may not be given to the possibility of such events.
Hence, it is said that insurance is sold, not bought, as the customer needs to be educated
and counselled. Insurers also study incidents of fire to fine-tune their products, pricing
and processes on an ongoing basis.

9.2 FIRE INSURANCE AND PROPERTY INSURANCE

In the previous paragraph, the words fire and property have been used to bring in the
contextual background. At this point, it becomes necessary and important to
conceptually understand the differences and linkage between Fire Insurance and
Property Insurance.
Property Insurance is the wider concept, and Fire Insurance is a part of it. In other
208 words, Fire Insurance is a subset of Property Insurance. Thus, Property Insurance
includes Engineering Insurance (e.g. of project sites), in addition to Fire Insurance. Property Insurance

Fire Insurance policies generally cover a more limited set of perils, as compared to
Property Insurance. This clarifies the conceptual difference between Fire Insurance
and Property Insurance.

In India, the scope of Fire Insurance can be enhanced to include Industrial All Risk
(IAR) Package Policy. As packaged policies become wider in coverage, the distinction
between Fire and Property Insurance gets increasingly blurred.

Activity 9.1

(i) Examine your own household and neighbouring area and identify properties that
could come under insurance cover

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(ii) Examine a business premises (office/factory/godown) and identify properties that

could come under insurance cover

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Distinctive Features of Fire Insurance

Between Fire Insurance and other types of insurance, there are several commonalities
and a few distinctive features. The distinctive features of Fire Insurance are stated
below.

 Fire Insurance is useful to dwellings and industrial segments, households,

commercial establishments (shops, offices, factories) as well as non-commercial
establishments such as schools, colleges, hospitals etc.

 Although Fire Insurance is a subset of Property Insurance, Fire Insurance

itself is quite wide in its scope, viz., the Standard Fire and Special Perils
(SFSP) Policy also covers natural perils such as Storm, Tempest, Flood,
Inundation (STFI) and man-made perils such as Riots, Strikes, Malicious &
Terrorism Damage (RSMTD) as detailed in this unit.

 Consequential losses are covered for loss of profit during the closure of a
business due to fire. The consequential losses policy is offered only in
addition to a fire policy (material damage) and not sold on a stand-alone
basis. Hence, such insurance against ‘loss of profit’ are not a violation of the
Principal of Indemnity.

 Customized Fire Insurance policies can be offered to businesses having

higher fire hazards, such as petrochemicals, nuclear power etc.where the
underwriter assesses non-standard risks unique to each business and fixes
the premium rates based on such underwriting considerations. Insurance works
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General Insurance out to be economical based on the statistical ‘Law of Large Numbers’, i.e.
large number of small policies, hence the magnitude of the total claim amounts
is small. In the case of say, large petrochemical complexes, there are a small
number of large policies, hence the magnitude of total claim amounts is large.

9.3 PRINCIPLES OF INSURANCE: AS APPLICABLE

TO FIRE INSURANCE
The basic principles and their applicability to fire insurance is discussed here. The 4
basic principles of insurance (Utmost Good Faith, Insurable Interest, Indemnity and
Proximate Cause) and 2 Corollaries to Indemnity (Subrogation and Contribution),
remain the same for all branches of insurance. Their specific applicability to Fire Insurance
is tabulated below.

Principle of Insurance Applicability to Fire Insurance

Utmost Good Faith The contract of insurance between the two parties insured
(Uberrima Fides) (customer) and insurer is governed by the spirit of utmost
good faith. The insured (customer) must disclose
information and subsequent material alterations truthfully,
without any intention to deceive the insurer, to enable the
insurer to fairly assess risks, policy value and claim
amount. (e.g. nature of business, type of goods stored,
value of assets and goods etc.). Where the insurer or his
nominee surveys the premises, onus of ascertainment of
information is on the insurer. It is also the duty of the
insured to act prudently, by safeguarding at all times and
mitigating or minimizing the insured assets against risk.
This results in the insured not taking undue advantage
through negligence in respect of assets insured, and not
exposing it to risks that are under his control (e.g. safe
distance between goods and sources of heat). Failure on
the part of the insured gives the insurer the right to void
the contract.

Insurable Interest Only persons who have an insurable interest in the

subject matter (assets, goods) can buy a policy.
Owners of factory buildings or banks who have given a
loan for the factory buildings are examples of persons
who have insurable interest. Eg. HDFC, upon sanctioning
a housing loan to a borrower, may recommend that the
latter take a Fire Insurance cover from HDFC Ergo
General Insurance or any other insurer; in the event of a
fire, however unlikely, the compensation enables the repair
of the home or purchase of a new house. In this case,
both – the borrower as well as HDFC have an insurable
interest in the safety of the house. This aspect distinguishes
Fire Insurance from wagering or speculative betting.
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 Property Insurance
Indemnity It is the duty of the insurer to compensate the insured
for losses covered in a Fire Insurance policy, i.e. indemnify
the customer against financial losses. The claim amount
cannot exceed the amount of loss, as the objective of
insurance is compensation to the pre-loss position, and
not to result in a profit to the insured. The Sum Insured
(relatable to the value of the assets) is arrived at by various
methods: Fixed Sum, Market Value (Original Cost minus
Depreciation till date), Reinstatement Value (Cost of New
Asset), Agreed Value (e.g Art, Heritage buildings). In case
of Reinstatement Value, a relatively higher premium may
be determined by the insurer.
Subrogation (Corollary, The insurer, on payment of claim amount to the insured,
subset of Principle of obtains all rights of the insured. For example, if the full
Indemnity) claim is paid out for partially damaged goods, the insurer
gains rights to sell the salvage and also claim damages
against all third parties, if any, responsible for the loss.
This reduces the net claims of the insurer. In the absence
of the Principle of Subrogation, the insured could get the
full claim amount plus proceeds of salvage, resulting in a
gain. This would be a violation of the Principle of
Indemnity.
Contribution (Corollary, If an insured has more than one policy on the same asset/s,
subset of Principle of the settled claim amount is divided across each insurer,
Indemnity) so that the total claim amount received by the insured
from all insurers does not exceed the amount of loss.
Each insurer bears a proportion (known as rate-able
proportion) of the loss. In the absence of the Principle
of Contribution, an insured can receive an amount
resulting in an unintended gain. This would be a violation
of the Principal of Indemnity.
Proximate Cause There needs to be a direct cause-effect relationship
(Causa Proxima) between the loss-causing event and the loss. In other
words, the loss must be a consequence of an event
covered under the policy. The loss cannot be triggered
by any event not covered by the policy, and must be an
event of chance. This is known as novosactus
interveniens, to ensure that no new intervening event
not covered by a policy is the true proximate cause of
the loss-making incident.
E.g. If a policy document specifically excludes war, then
losses arising from fire caused during war are not covered,
as the proximate cause is war, although the subsequent
event is fire. It must be noted, however, that in case war
risk is specifically covered under the policy and premium/
higher premium paid, then losses due to war risk are
included.
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General Insurance Activity 9.2

Give examples of how a potential customer with wrong intentions could misuse fire
insurance, involving violation/s of the basic principles.

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9.4 PRODUCTS: RANGE OF COVERS

Under the ambit of Fire Insurance, the common Proximate Cause is a fire accident. In
reality, the Standard Fire and Special Perils Policy has a wider ambit and lists the
following:

Perils Covered (12) General Exclusions (13) General Conditions (14)

Fire 5% of every claim Voidable on Non-Disclosure

(deductible)

Lightning War, Civil War Loss up to 7 days after

buildings fall

Explosion/Implosion Nuclear Risk Material Alteration

Aircraft Damage Pollution, Contamination Covered under Marine Policy

RSMTD Bullion, Art, Books, Termination: 15-day notice

Explosives

STFI Stocks in Cold Storage Claim in 15 days, extension

12 months.

Impact Damage from Electrical Machines, Insurer’s Right of Entry

3rd party Apparatus

Subsidence, Land/ Architects Fee, Debris Fraud and Forfeiture of Policy

Rock-slide Removal

Burst/Overflow of Loss of Earnings Pro-rata Average Condition

Water-tank

Missile-testing Spoilage from Process Contribution Condition

Operations

Leakage from Loss by Theft during/after Subrogation Condition

Sprinklers Peril

Bush-fires Earthquake/Volcanic Arbitration

Damage to Property Communications in Writing

Off-site Premium: Sum-Insured match
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Most of the terms in the above lists are self-explanatory. However, a comprehensive Property Insurance

understanding is provided on the other items, in the paras below.

9.4.1 Perils Covered: The list shows that the Standard Fire and Special Perils
(SFSP) Policy covers several perils in additions to Fire. Impact Damage (like Aircraft
Damage) refers to damage caused by impact with any train, bus, vehicle or animal.
Leakage from Automated Sprinklers are also covered. Bush-fires refer to shrubs and
grassy areas adjoining the insured premises that cause fires to spread. Bush-fires are
viewed as distinct and different from Forest Fires, being smaller and less impactful.

General Exclusions: Generally, 5% of every claim is to be borne by the insured. This

is known by various names, such as a deductible, excess or franchise. The logic
behind this is, that the first loss of 5% needs to be borne by the insurer, to enforce a
behaviour of prudence, rather than negligence. War, nuclear risk and pollution damage
are excluded. Bullion, Art, Coins & Stamps, Books of Account, Computer Records
are also generally excluded as also explosives on the premises. Stocks in Cold Storage
that are damaged due to temperature fluctuations are excluded. Fees to Architects,
Surveys, Engineers etc. are excluded. If included under costs to be reinstated, Architect’s
fees in excess of 3% of the Sum Insured are excluded. Loss of profit during the period
of business interruption are excluded. In case of Debris Removal, up to 1% of the
claim amount can be considered, the remaining portion is excluded. Damage to
machinery and property due to covered perils but outside the insured’s normal premises
are excluded, unless removed temporarily for repairs. While the nature of the General
Exclusions are listed and elaborated upon, it may be noted that the coverage
of Fire Insurance can be extended with additional premiums.

General Conditions: Any acts of non-disclosure, mis-statement or misrepresentation

of facts by the insured, renders the insurance contract voidable at the option of the
insurer. Any material alterations in the business are to be communicated to the
insurer for continuance of cover. Losses incurred up to 7 days after the fall of a building
are covered. Claims are to be notified to the insurer within 15 days from the loss event,
and extendable with the consent of the insurer for a period of up to 12 months. This
12-month limitation period does not apply to claims already under process by the
insurer. An insurance policy can be terminated by mutual consent, and the pro-rata
premium be returned by the insurer. In case of fraud, the insurance policy and premium
stand to be forfeited. The premiums paid shall be of such amounts as to maintain the
Sum Insured at all times – this becomes applicable in case of claims paid during the
period of insurance and claim amount getting reduced from the Sum Insured.

An important aspect of Fire Insurance is under-insurance and application of the

Average Clause. Numerical examples illustrates this:

Illustration 1

If the Sum Insured is Rs.1,00,000 and value of a property is Rs.1,50,000 and the
claim loss is Rs.90,000. This is a case of under-insurance, since the value of the property
is Rs.1,50,000 as against the Sum Insured of Rs.1,00,000. The entire claim of
Rs.90,000 will be adjusted in the proportion of Rs.1,00,000/Rs.1,50,000, i.e. 67%.
Now, 67% of Rs.90,000 = Rs.60,000. Hence, Rs.60,000 will be the amount of claim
admitted for release of payment.
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General Insurance Where a number of assets are insured, with sub-limits, claim losses will be
adjusted by using the Average Clause in respect of each class of assets
separately, using the formula:

Sum Insured/Value of Asset x Amount of Loss = Claim Admitted.

Illustration 2

The same company has 3 Assets – A, B and C, details as follows:

Asset A, Sum Insured Rs.1,00,000, property value Rs.1,50,000, claim loss Rs.90,000

Asset B, Sum Insured Rs.2,00,000, property value Rs.2,00,000, claim loss Rs.80,000

Asset C, Sum Insured Rs.3,00,000, property value Rs.2,50,000, claim loss

Rs.2,50,000

In the case of Asset A, the Average Clause applies, and the amount of claim admitted
will be Rs.60,000 i.e., 1,00,000/1,50,000 x 90,000 = 60,000. In the case of Asset
B, there is no under-insurance and the full claim of Rs.80,000/- can be admitted. In
case of Asset C, there is over-insurance, where there is no extra benefit, as the claim
loss will be limited to the property value of Rs. 2,50,000. Moreover, it is to be noted
that the over-insurance in case of Asset C cannot be adjusted against the under-insurance
of Asset A. Hence, each asset category is viewed as a distinct cluster.

9.4.2 Add-on Covers

In continuation to the General Exclusions listed under the Standard Fire & Special
Perils (SFSP) Policy, 15 add-on covers are available on payment of additional premium,
as mentioned below.

Add-on Cover Description

Spontaneous Combustion (by Fire only) Rating (rate per Rs.1000 Sum Insured)
based on Low/Medium/Variable/High

Earthquake (Fire and Shock) In respect of premises covered in Main

Policy, applicable with a 5% excess.
Earthquake rates are based on Zone I/
II/III/IV (Severe to Mild), and Non-
Industrial/Industrial (Low to High)

Forest Fire – loss directly by burning Rates are based on 5-years claims
experience

Impact Damage from Own Vehicle Power-driven vehicles, forklifts,

cranes, articles

Stocks in Cold Storage – Power-cut on Power cuts due to fire caused by

peril insured peril

Stocks in Cold Storage – Temperature Temperature fluctuation caused by

variation power outage consequent to insured
peril
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 Property Insurance
Architect’s Fee in excess of 3% of Sum Not to exceed 7.5% of claim amount
Insured
Debris Removal in excess of 1% of Not to exceed 10% of claim amount
Sum Insured
Omission to Insure, Alterations, Additions Not to exceed 5% of Sum Insured.
Extension granted on payment of
additional premium at policy rate
Spoilage Material Damage Cover Loss of stock in process, machinery
and containers, average clause
applicable to each block of assets
Leakage and Contamination Cover Applicable to oils and chemicals only,
due to accidental contamination
Temporary Removal of Stocks Clause Not to exceed 10% of Sum Insured
Loss of Rent Clause Only if building unfit for occupation.
For a period necessary for
reinstatement
Rent for Alternative Accommodation For non-manufacturing premises,
limited to the additional rent for
alternative premises

Startup (Restart) Expenses Necessary and reasonable expenses

9.4.3 Special Clauses

Other Special Clauses relevant to Fire Insurance are tabulated as under:

Special Clause Description

Escalation and Reinstatement Value Applicable to Building, Plant and Machinery.
(RIV) Escalation rate is @ 1/365 computed on a
daily basis from inception of cover, subject
to 25% of Sum Insured, at a premium of 50%
of the final rate. RIV is to compensate for
inflation and is subject to ‘same type’ and not
a superior model. Can also cover additional
expenses for complying with Government or
Local Municipal Authority regulations
Declaration Policies To cover assets whose value fluctuates
frequently, based on the highest anticipated
value of stocks
Floater Policies Where there is a movement of stocks between
various premises

Special Clauses:- Agreed Bank Clause, Contract Price Insurance

Clause, Designation of Property Clause 215
General Insurance
Agreed Bank Clause (where asset is financed
by loan from bank/financial institution),
Contract Price Insurance Clause (in respect
of imported goods) and Designation of
Property Clause (for mutual understanding
between insured and insurer on classification
of asset for reference by Surveyor – whether
Plant/Machinery/Equipment, to avoid disputes
later. Sometimes concrete walls are classified
as plant and pumps are classified as
machinery.

Some of the Packaged Policies include: Homeowner’s Comprehensive Insurance,

Shopkeeper’s Comprehensive Insurance and Banker’s Blanket Insurance. Customized
Policies include: Exposure-rated products such as Earthquakes, or Insurances for
Large Risks, e.g. Properties of Rs.2,500 crore or more at one location for property or
material damage.

Consequential Loss Policies are offered only as an add-on to the Fire Policy.
Consequential Losses arise due to loss of profit on account of the business interruption
caused by fire. The coverage period could be for 3 months to 3 years. The Turnover
(total sales or revenue) of a full Financial Year preceding the date of damage are
considered. If Turnover is Rs.20 lakhs and Variable Costs Rs.15 lakhs, the difference
= Rs.5 lakhs is called Gross Profit; the

Gross Profit Margin is 5/20 x 100 = 25% of Turnover. The turnover of the 12-
month period immediately preceding the loss event is considered, and compared with
the Turnover of the corresponding post-loss period, to determine the Turnover lost.
When multiplied by the Gross Profit Percentage, the resultant amount is the insurable
‘loss of Gross Profit’. Also insurable are Standing Costs (such as overheads) and
Increase in Cost of Working (ICW) incurred during post-damage situation. Other
payments coverable are statutory payments to workers under labour laws and auditors’
fees. Specific mention needs to be made of coverage and extensions, in the policy
document, with definitions of terminologies.

There are Specialized Policies for Petrochemicals, a high-risk activity. For Industry,
there are Packaged Policies such as the Industrial All Risk (IAR) and Commercial
Package Policy (CPP). In IAR, the perils covered are: Fire, Burglary, Machinery
Breakdown, Boiler Explosion, Electronic Equipment Insurance and Fire Loss of Profit.
Such wider packaging diminishes the distinction between Fire Insurance and Property
Insurance. Notably, cargo, if covered under some door-to-door Marine Policies, are
excluded from the Fire Policy, demonstrating the possibility of overlaps with widening
Fire Insurance covers.

Activity 9.3

Identify the features of any fire insurance policy and note it down in your own words.
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9.5 PROCESSES: FIRE INSURANCE BUSINESS AND

OPERATIONS
Operations: Proposal-Claim-Renewal Cycle

Proposals are evaluated by the Underwriting department, which evaluates the risks
brought in by each proposal and, if found acceptable, lays down conditions and prices
the policies. This is followed by the issuance of the policy. Unlike life insurance policies
that are long term from age of entry until attainment of age 60, Fire Insurance policies,
like all non-life policies are generally for periods up to one year. In case claims do not
arise before expiry of the policy, nothing further needs to be done. In case a claim
arises, the same is evaluated by the claims department. A surveyor’s report evaluates
the genuineness and magnitude of the losses and the claims department makes the
requisite payment. The final step is renewal, upon expiry of a policy.

The Operational cycle is as follows:

Proposal

Underwriting


Policy Issuance

Claims

Renewal

The technical aspects of each step in the cycle are explained in detail in the following
paragraphs.

9.5.1 Proposal
The sales team, having explained the importance and need for Fire Insurance to the
customer, gets the Proposal Form filled in. The Proposal Form is designed so as to
garner full and correct information to the extent possible. A properly designed and
filled-in Proposal Form enables the Underwriting department to correctly process the
proposal for consideration and issue of the Policy Document. The Principles of Insurable
Interest and Utmost Good Faith (Uberrima Fides) apply. On the part of the customer,
disclosures are to be made in good faith; on the part of the insurer, the customer is
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General Insurance enabled to take an informed decision. The filled in Proposal Form is accompanied by
the first premium payment.

The Proposal Form of an SFSP Policy contains the following points:

Point Explanation

Pre-condition The insurance cover does not commence unless the proposal is
accepted and premium paid.

Proposer Name, Address, Contact Details, Business, Parties having

Insurable Interest, Location, Period of Insurance, Whether
insurance declined by other insurers, Past 3 years premium and
claim history

Coverage Whether STFI, RSMTD and additional cover are required, any
add-on covers required, whether plinth is to be covered

Property Type of Property, Goods Stored, Goods Manufactured, Fire

Protection devices, Storage Area details, Construction Material
in Building, Height and Age of Building

Sum Insured Separately for each Block of Assets: Buildings, Machinery,

Furniture & Fittings, Stocks

Declaration Details in the Proposal Form are declaratory in nature and

misrepresentation could result in the contract of insurance being
void at the option of the insurer

All entities in financial services, including insurance, are required to gather Know Your
Customer (KYC) related information compliant under the Prevention of Money
Laundering Act (PMLA), 2002. Such data include the Proof of Identity, Proof of
Address and Income Tax Permanent Account Number (PAN). This may also be
incorporated into the details of Proposer.

Activity 9.4

Examine a Proposal Form and note down your observations

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9.5.2 Underwriting
The Proposal Form is examined in detail and information gaps are filled in by making
queries or cross-verification. The Principle of Utmost Good Faith is tested here for
adherence. The idea is to examine the perils, hazards and risks associated with the
new proposal. Besides, the overall portfolio is also examined, from a risk management
perspective (e.g. a single insurance company cannot have too many textile companies
at a single location as a major part of its customer portfolio – a single event could wipe
out the insurer’s capital). Insurance works on the Law of Large Numbers, a statistical
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probability concept that: the larger the pool of insureds, fewer the proportion of claim Property Insurance

losses to the total premium, in a given year. Also, conditions laid down by the reinsurer,
if any, need to be taken into consideration. If the risks associated with a particular
proposal are relatively higher than the standard or norm, the premium rates could be
enhanced, or exclusions may be specified. Relatively safer proposals may be given a
concession in the premium rates (Claims Experience Discount = CED and Fire
Extinguishing Appliances = FEA Discount). Premium Rates are generally quoted per
Rs.1,000 of Sum Insured. Thus, Sum Insured (Rs) x Rate (per Rs.1000) = Premium
(Rs.)

For example, if the Sum Insured is Rs.5,00,000 and Rate is Rs.5 per Rs.1000 (5/
1000) of Sum Insured, the Premium will be (Rs) 5,00,000 x 5/1000 = Rs.2,500.

The Principle of Indemnity applies here for compensation of loss, and not result in a
gain for the insured. Terms and conditions incorporate the Principle of Indemnity and
the Corollaries: Subrogation and Contribution. Subrogation means that the insurer, in
consideration for the compensation, acquires all rights against third parties relevant to
the policy, that vested in the insured. Contribution means that in the event the same loss
is covered under multiple policies, the total compensation to the insured shall not exceed
the loss, and the compensation is proportionately borne by all insurers. The Principle
of Proximate Cause is also embedded into the terms and conditions.

An important underwriting consideration is the fourfold aspects of:

Fire Hazard Fire Load Fire Resistance Fire Prevention

Fire Hazards- can be Originating, Contributing and Construction. Originating hazards

are the source of fire, such as electrical short-circuit. Contributing hazards are those
that magnify the fire, such as accumulated rags or scrap. Construction hazards result
from construction activity in the near proximity.

Fire Load- refers to the enhanced possibility for various classes of occupancy, viz.
Residential (Low), Retail Shops, Offices and Factory Buildings (Medium) and Bulk
Storage Godowns and Warehouses (High).

Fire Resistance- refers to the ability of various materials or structures to withstand

heat. The National Fire Code of India classification is Class I (4 hours), Class II (3
hours), Class III (2 hours) and Class IV (1 hour). Construction features and construction
material, and Exposure to a source of heat or fire are hazards that are important while
evaluating resistance.

Fire Prevention- measures contribute towards loss reduction and hence an important
aspect of underwriting. Fire Prevention measures include: Fire Extinguishment Systems,
Good/Bad Housekeeping practices, Storage Systems, Staff Loyalty, Staff Discipline
and Combustible Litter.

The outcome of underwriting is a Risk Inspection Report, whose main ingredients

are tabulated below.
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General Insurance
Point Explanation

Objectives Complete picture, Recommendations, Claims history, Probable

Maximum Loss (PML)

Scope Location, brief history, buildings, constructional features

Lighting, heating and power
Process of manufacture
Exposure
Fire protection Management & supervision
Moral hazard (character of insured’s management)
Adequacy of Sum Insured
Insurance and loss experience
Risk improvement
Probable Maximum Loss (PML)
Site Plan (diagram – as an Annexure)

Thus, the discussion on underwriting can be rounded up in the following paragraph.

Underwriting involves the acceptance or rejection of proposals based on the assessment

and pricing of risks and making decisions on retention versus transfer of risk (through
reinsurance). Reinsurance is insurance ceded by the insurer to a reinsurer (insurer’s
insurer). The insurer cedes premium to the reinsurer in the same proportion to the sum
insured ceded to the reinsurer. A reinsurer may place certain criteria which the insurer
adheres to when underwriting proposals.

The objective of underwriting is to look at risks in individual proposals as well as their

addition to the overall portfolio. The overall objective is to generate business volumes,
earn premium income and profits after bearing claim losses, and marketing &
administrative expenses.

Underwriting factors are:

 Large volume of business, to permit the Law of Large numbers to operate

 Prudent selection of business, based on geographical and diversification of

assets

 Fixing of retentions and transfers through reinsurance

Reinsurance, in brief, can be in two manners – Facultative and Treaty.

Under Facultative, the insurer adopts a pick and choose approach while using the
reinsurance limit. Whereas in Treaty, a pre-determined ratio of all proposals covered
under the treaty are shared.

9.5.3 Policy Issuance

The Policy Document, guided by inputs from the underwriting department, specifies
the exact period of coverage, premium details, policy amount, scope of coverage,
terms and conditions. It reiterates all the 4 Principles and 2 Corollaries of insurance. It
also specifies the mode of making a claim in the event of a loss.
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In practice, a two-step procedure is followed. It is customary to issue an Acceptance- Property Insurance

cum-Receipt or a Cover Note to the insured, pending preparation and dispatch of

the detailed Policy Document.

Main contents of the Acceptance-cum-Receipt or Cover Note are as follows:

Point Explanation

Main Note Policy No., Period, Property Covered, Perils Covered, Sum
Insured, Premium Paid

Schedule Name and address of Proposer, Brief Description of Property, Sum

Insured, Period, Risks Covered, Rate of Premium (provisional, if
not Immediately ascertainable)

The Policy Document or Policy Schedule comprises of 3 parts, as tabulated below.

Point Explanation

Identification Name and Address of Insured and Insurer, Policy No., Cover
Details Note No., Policy Period, Co-Insurer/s, if any

Risk Description Description of Property and Address, Premium, Sum Insured

Details (separately for each Block of Assets), Applicable Warranties
(conditions attached), Agreed Bank’s Clause (where asset/s is
on loan from a Bank), Discounts, 5% discount in case of
proposal routed through Bank, Net Premium.

Endorsements are made by the insurer after approving, for

changes in Name of insured, Bank Clause, Change of Address
or Location of Property, Alteration in Construction, Occupation,
Sum Insured or Period of Insurance

Occupancy-wise Risk Code, Rate for Buildings & Contents, Claims Experience
Net Rate Data Discount (CED), Fire Extinguishing Appliances (FEA) Discount,
Net Rate

Activity 9.5

Make visits to a dwelling unit and a business organization and list down the various
risks, from an insurer’s viewpoint.

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9.5.4 Claims
Claims are at first intimated by the insured, and recorded by the insurer. A surveyor
shall, after confirming that the policy is in force, make an assessment of adherence or
otherwise of the policy conditions, and evaluate the losses and specify the net claim 221
General Insurance amount. The Principle of Proximate Cause, of all stated principles, is the most applicable
at this stage. On receipt of survey reports, the recommended claim amount is released.
In case of large and complex cases, an ‘on-account’ payment is released, to enable the
insurer to bear urgent repair expenses, and adjusted against final claim and disclosed in
the financial accounts. Provisions are also made in the accounts for known losses but
not intimated (Incurred But Not Reported – IBNR).

The Legal and Procedural aspects of Claims are detailed in the paragraphs below.

The Legal Aspects of Claims are: the insured acts in Utmost Good Faith and makes
all effort at mitigating losses; the insurer on his part also agrees to abide by the same
principle while indemnifying the insured against covered perils, in the spirit of the contract
of insurance. The insured shall, upon intimating the insurance company, cooperate
with the fire-fighting agencies and submit all proofs of losses supporting the claim and
make true declarations. The insurer, on his part, on receipt of the Claim Form will
verify the Proximate Cause and indemnify the insured, taking into consideration the
Market Value, Depreciation or Reinstatement Values, as the case may be and make
deductions (excess) as applicable. The insurer has the right to enter the premises, and
ascertain the adherence to warranties or conditions specified in the policy. In case of
under-insurance, the pro-rata average condition applies, as explained in illustration
2 above. Procedures laid down by the Insurance Regulatory and Development Authority
of India (IRDAI) and the Institute of Insurance Surveyors and Loss Assessors (IISLA)
provide the framework for actions.

Ex-gratia payments (i.e. compensation amounts not included in the policy) may be
made without legal liability or obligation. Such Ex-gratia payment is made ‘without
prejudice’ to or without admission of liability of the insurer, has the effect of waiving off
the Principle of Subrogation. The Ex-gratia payment is made after consulting the co-
insurers and reinsurers, as may be the case.

The Procedural Aspects of Claims are:

 Verify Policy coverage and period on receipt of claim

 Register claim and allot Claim Number

 Issue Claim Form

 For large claims, appoint surveyor

 Surveyor submits preliminary report

 Surveyor submits final report with loss assessment (within 30 days, maximum)

 From settlement amount, deduct premium for remaining period pro-rata, to

retain full insurance

 Get discharge voucher signed and issue cheque

 Claims paid to be reflected in insurer’s financial accounts

 Surveyor’s duties as per Insurance Surveyor and Loss Assessors (ISLA)

Regulations, 2000
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  In reinstatement claims, surveyor needs to physically verify reinstated assets Property Insurance

 In business interruption claims, surveyor plays role of Managing Director (MD)

for loss minimization

 In small and simple claims, surveyor examines damaged property and

ascertains proximate cause

 In large complex cases, inspection report is detailed, loss minimization and

salvaging steps suggested

 Early and thorough examination is best suited for determining cause of fire

 Thorough examination determines value and property and extent of loss

 No fixed format of Final Survey report. Name of bank/financial institution,

mortgage/loans required

 In simple claims, survey recommends amount, after discussion and negotiation

with insured

 In complex claims with extensive damage, survey report is more detailed

9.5.5 Renewal
The nature of Fire Insurance (like all general insurance products) is short-term, extending
up to one year, renewable based on mutual consent and based on approval by the
underwriting department. Each renewal is a separate contract of insurance. From the
insurers’ viewpoint, the renewal and its terms are based on the claim history, new risks
perceived, and appropriate pricing. The Principal of Utmost Good Faith is once again
reinforced at this stage.
Activity 9.6
(i) Examine a Claim Form and note down the salient features
........................................................................................................................
........................................................................................................................
........................................................................................................................
(ii) Speak to a representative of an insurance company and also to a claimant, and
note down their experiences
........................................................................................................................
........................................................................................................................
........................................................................................................................

9.6 SUMMARY
In this unit we have discussed how in common parlance, Fire Insurance and Property
Insurance are used interchangeably. The distinctive features of fire insurance are also
covered. In specific terms, Property Insurance is the wider term and includes Fire
Insurance plus Engineering Insurance. However, due to ever-widening coverage of 223
General Insurance Package Policies, the distinction between Fire Insurance and Property Insurance is
increasingly getting blurred.

This unit covers all the established and time-honoured principles of insurance that apply
to Fire Insurance. Fire safety measures by the insured, average clause, architect’s fee,
debris removal, large risks and consequential loss coverage are features unique to Fire
insurance and ingrained into the basic principles, are also dealt with. The Standard Fire
and Special Perils Policy states the covers, general exclusions and general conditions.
The general exclusions that can be considered under add-on covers at an extra premium
is also discussed. The various aspects related to underwriting, policy issuance, claims
and renewal are also given.

9.7 KEYWORDS
Fire Hazards : can be Originating, Contributing and Construction. Originating
hazards are the source of fire, such as electrical short-circuit.
Contributing hazards are those that magnify the fire, such as
accumulated rags or scrap. Construction hazards result from
construction activity in the near proximity.

Underwriting : is based on a consideration of various hazards, load, resistance

and preventive measures. These conditions go into the rating
process for the purpose of pricing.

Claims : are verified by examining the proposal form, policy, claim

form and surveyors’ report. Claim amounts are settled based
on amounts and deductions recommended by the surveyor.

Renewals : are made based on mutual consent, generally on an annual

basis, with conditions and pricing based on the past claims
experience.

9.8 SELF-ASSESSMENT QUESTIONS

1. Compare and contrast the concepts of Property Insurance and Fire Insurance
and give your comments. What are the distinctive features of fire insurance?

2. Provide one example of each Principle and Corollary of Insurance, as applicable

to Fire Insurance.

3. What are the Perils covered under the Standard Fire and Special Perils (SFSP)
Policy?

4. Describe the General Exclusions under the SFSP Policy and the available Add-on
Covers.

5. Explain the concept of under-insurance and over-insurance with your own

numerical examples

6. Explain in brief: Fire Hazard, Fire Load, Fire Resistance and Fire Prevention.
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7. What are the features of a Risk Inspection Report? Property Insurance

8. What are the Legal Aspects of Claims processing? Discuss the Procedural Aspects
of Claims processing.

9.9 FURTHER READINGS

Fire and Consequential Loss Insurance (IC 57), Insurance Institute of India,
Revised Ed., 2015

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