For decades, fire has been the leading cause of loss of life, property, and business. These days, news headlines show the growing incidence of forest fires, blazes in buildings due to electrical wire failure, and explosive fires resulting in death. While preventing fire is not always practicable, as an individual or business owner, you can mitigate the financial loss caused by fire. Fire insurance is one such solution. As the name implies, this insurance covers losses or damages caused by fires.
Fire insurance can be classified into four types: standard plan, householder’s policy, industrial all-risk coverage, and consequential loss policy. Let’s explore its features to gain a thorough understanding of fire insurance.
Features of Fire Insurance Policy
The following are the features of a fire insurance policy.
1. Insurable Interest
You must have an insurable interest in the property. That implies you can only receive coverage and make claims for the property whose destruction causes you financial loss, and by keeping it intact, your firm thrives. For example, if you are a customer of a shop in your neighbourhood, you cannot purchase fire insurance for that shop, nor can you file a claim if it burns down.
However, it is important to note that Insurable Interest must exist when applying for coverage as well as filing a claim.
2. Utmost Good Faith
As a proposer, you must demonstrate utmost good faith. It means you should disclose all relevant material facts that may financially impact the insurer.
When applying for coverage, include the following information accurately —
- Business location: If your company is near a chemical or petroleum production unit, your facility is at high risk of fire damage due to the explosive nature of such factories.
- Business type: Some enterprises are prone to fires. For example, if you own a restaurant, you are at greater risk of fires due to gas cylinders and other combustible items, such as oil, in your kitchen.
- Construction: Specify whether your office meets the legal safety criteria.
Remember, hiding crucial information may render your policy null and void. According to the utmost faith feature, the insurer must also reveal all relevant information, such as incidents covered, exclusions, the procedure for claim filing, and other details that influence the customer’s decision to choose a plan.
3. Contract of Indemnity
Fire insurance is an indemnification contract. It means that if a fire destroys your property, instead of receiving a lump sum, you will be reimbursed for the actual loss up to the amount insured.
It is worth mentioning that the property’s depreciation and salvage value are deducted from the claim amount. This clause ensures the insured does not profit from his/her insurance policy by filing bogus claims.
4. Direct Cause of Loss
The insurer will only accept the claim if the fire was the direct cause of the loss. Furthermore, the claim will be accepted only if the fire incident was unavoidable and accidental.
The policy is null and void if the loss is caused by theft, water ingression, explosion, or nuclear perils.
5. Personal Insurance Contract
A fire insurance agreement is a personal insurance contract based on the relationship between you and your insurer. That means you cannot transfer the insurance to a third person. If you sell or transfer the property ownership, the coverage will automatically be terminated.
6. Personal Right
You, the insured, must file a claim and get reimbursement for the loss and damage associated with covered fire incidents. You cannot assign the claim filing right to another person. If you intend to do so, you must first get the insurer’s permission.
As an insured, you can sue the insurer for breach of contract if they fail to pay the claim.
7. Valuation of Property
The insured value of fire insurance is based on the market or replacement value. The replacement value is the amount needed to replace the damaged or lost property with a new one of identical quality and type.
For example, if a fire damages the PCs in your office, you cannot file a claim to replace them with laptops.
The market value, on the other hand, is the amount your insured property would have sold for immediately before the fire incident.
You can decide between replacement and market worth after assessing your pocket.
8. Deductibles and Limits
Fire insurance comes with deductibles. That means the policyholder must bear a certain portion of the actual loss permissible at the time of claim settlement.
As previously discussed, it also has some capping. Regardless of the nature of the loss, you will only be compensated up to the amount insured.
Conclusion
Knowing the features of a fire insurance policy makes the claim process go more smoothly. It also assists you in determining the best coverage for your business based on its size, type of work, and anticipated loss from fire-related catastrophes. While purchasing this coverage, it is recommended that you review the insurer’s policy document, the inclusions and exclusions, and check the claim settlement ratio.
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