SUBJECT: INSURANCE LAW

FIRE INSURANCE CONTRACT

Submitted By:
Rishikesh Kumar
Roll no. 1366
4th Year , 8th Semester, B.A.LL.B(Hons.)

Submitted to:
Shantanu Braj Choubey
Faculty of Insurance Law

Chanakya National Law University, Patna

March, 2019
 TABLE OF CONTENTS
ACKNOWLEDGMENT ........................................................................................................................ 3
CHAPTER 1: INTRODUCTION ............................................................................................................. 4
Aims and Objectives: .................................................................................................................. 5
Research Questions: .................................................................................................................... 5
Research Methodology: .............................................................................................................. 5
Sources of Data: .......................................................................................................................... 5
CHAPTER 2: MEANING, NATURE AND SCOPE OF FIRE INSURANCE CONTRACT .................................. 6
Meaning of Fire Insurance .......................................................................................................... 6
Coverage ..................................................................................................................................... 6
CHAPTER 3: ELEMENTS OF A FIRE INSURANCE CONTRACT ............................................................... 8
Feature of general contract.......................................................................................................... 8
Insurable interest: ...................................................................................................................... 11
Principle of Good Faith:............................................................................................................ 13
Principle of indemnity: ............................................................................................................. 14
Interpretation of Indemnity ....................................................................................................... 15
CHAPTER 4: TYPES OF FIRE INSURANCE POLICIES .......................................................................... 16
Specific policy .......................................................................................................................... 16
Comprehensive policy .............................................................................................................. 16
Valued policy ............................................................................................................................ 16
Floating policy .......................................................................................................................... 16
Replacement or Re-instatement policy ..................................................................................... 16
CONCLUSION.................................................................................................................................. 18
BIBLIOGRAPHY .............................................................................................................................. 19

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 ACKNOWLEDGMENT

Writing a project is one of the most significant academic challenges, I have ever faced. Though
this project has been presented by me but there are many people who remained in veil, who gave
their all support and helped me to complete this project.

First of all I am very grateful to my subject teacher Mr. Shantanu Braj Coubey without the kind
support of whom and help the completion of the project was a herculean task for me.

I am very thankful to the librarian who provided me several books on this topic which proved
beneficial in completing this project.

Rishikesh Kumar

Roll no: 1366

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 CHAPTER 1: INTRODUCTION

A fire insurance policy covers the financial loss which insured may suffer due to destruction of
or damage to property or goods, caused by fire, during a specified period and up to agreed
amount. The policy specifies the maximum amount, which the insured can claim in case of loss.1
This amount is not, however, the measure of the loss. The loss can be ascertained only after the
fire has occurred. The insurer is liable to make good the actual amount of loss not exceeding the
maximum amount fixed under the policy. Fire Insurance is a contract between the insurer and the
insured to compensate for the loss which occurs by the fire in return of the consideration
(Premium) which is paid by the insured. Fire insurer shifts the burden of fire losses from its
actual victims over all members of the society which has taken this insurance.2 The individual by
taking fire insurance could prevent the loss to some extent. The party responsible to indemnify
the loss of the property insured is called the insurer and the party who is to be indemnified is
called as insured.

The insurer issues a policy which bears all the terms and conditions of the contract. The policy
contains the name and addresses of the insured, the subject – matter of the insurance, the sum
insured, the term and the premium. The premium rate is determined according to the nature,
location, construction of the property.

This project is an attempt to study the nature and scope of Fire Insurance in India. However, this
project also focuses upon the essentials of a fire contract and the types of fire contract. The
author has tried to explain the concept of fire insurance in India. In its entirety this project
encompasses the history of the fire insurance, what the insurance covers, what the things are not
secured by fire insurance claim. This project apart from dealing with the aforementioned
examines the procedure the procedure related to filing of Fire Insurance and Claims.

1
Available at, https://archive.india.gov.in/business/manage_business/fire_insurance.php
2
Available at, https://www.investopedia.com/terms/f/fire-insurance.asp
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AIMS AND OBJECTIVES:
The researcher aims to study Fire Insurance Contracts in deep detail. The main objective of the
researcher is to examine the application and the existing procedures in Insurance law pertaining
to fire insurance

RESEARCH QUESTIONS:
The researcher seeks to find the answer of the following questions:

1. What is a fire insurance contract?

2. Who is covered under Fire Insurance Contract?

3. What are the main features of Fire Insurance Contract?

4. What is the procedure to claim under fire insurance policy?

5. What are the properties exempted from protection under fire insurance contract?

RESEARCH METHODOLOGY:
The researcher is supposed to take up the doctrinal method in pursuance of the completion of this
project.

SOURCES OF DATA:
For the purposes of this project, the researcher shall place reliance on both, primary and
secondary sources.

Primary Source: Statutes, Act, Bills, Constitution, etc.

Secondary Source: Textbooks and Websites.

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 CHAPTER 2: MEANING, NATURE AND SCOPE OF FIRE INSURANCE
CONTRACT
The development of fire Insurance can be traced back to 1601 A.D. when the Poor Relief Act
was passed in England. Vide this act, letters called “briefs” were read from the church asking for
collections from the public to help those who suffered losses from fire. There was a great fire in
London–a historical disaster– in which within span of three days from 2nd to 5th Sept.‟1666, 80%
of the city was destroyed which sowed the seeds of fire Insurance as we know it now. 3 First, only
buildings were insured and the first fire office was established by a builder Nicholas Barbon in
1680.4 In 1708, Charles Povey founded the Traders Exchange for insuring movable goods,
merchandise and stocks against loss or damage and this was the first to insure both the building
and its contents.

MEANING OF FIRE INSURANCE

The term fire in a fire insurance is interpreted in the literal and popular sense. There is fire when
something burns. In other words fire means visible flames or actual ignition. Simmering/
smoldering is not considered fire in Fire Insurance. Fire produces heat and light but either of
themalone is not fire. Lightening is not a fire but if it ignites something, the damage may be due
to fire. The fire insurance business is defined as follows:
“Fire insurance business means the business of effecting, otherwise than independently to some
other class of business, contracts of insurance against loss by or incidental to fire or other
occurrence customarily included among the risks insured against in fire insurance”5
policies”.

COVERAGE
Fire insurance covers a policyholder against fire loss or damage from many sources. Sources
include fires brought about by electricity, such as faulty wiring and explosion of gas, as well as

3
See, “Insurance. Fire Insurance. Subrogation of Insurer.” Virginia Law Review, vol. 3, no. 1, 1915, pp. 78–79.
JSTOR, www.jstor.org/stable/1063875.
4
Fire Insurance: Definition, Functions, Importance (Explained), iedunotes, https://iedunote.com/fire-insurance
5
2(6A), Insurance Act 1938.
6 | P a g e FIRE INSURANCE CONTRACT
those caused by lightning and natural disasters. Bursting and overflowing of a water tank or
pipes may also be covered by the policy.

Most policies provide coverage regardless of whether the fire originates from inside the home.
The limit of coverage depends on the cause of the fire. The policy will reimburse the
policyholder on either a replacement-cost basis or an actual cash value (ACV) basis for damages.

If the home is considered a total loss, the insurance company may reimburse the owner for the
current market value. Typically the insurance will offer a market value compensation for lost
possessions, with the total payout capped based on the home's overall value. A policyholder
should check the home's value each year to determine if there is a need to increase the coverage
amount. A policyholder cannot get insurance for more than a home's actual value. Insurance
companies may offer stand-alone policies for rare, expensive, and irreplaceable items.

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 CHAPTER 3: ELEMENTS OF A FIRE INSURANCE CONTRACT

The elements of a Fire Insurance are as follows:

1. Feature of General contract
2. Insurable Interest
3. Principle of good faith
4. Principle of indemnity

FEATURE OF GENERAL CONTRACT

(a) Proposal:

The proposal for fire insurance can be made either verbally or in writing. The proposer gives the
necessary description of the property to be insured. In practice the printed proposal form is used
for the purpose.6 Introduction, type of properties, value of properties, construction, occupation,
etc., are the various information which is required by the insurer. The answers to these questions
must be completely correct. The assured must disclose all the material facts and should observe
utmost good faith. The description of the subject-matter of insurance is the basis of contract for
assessing the risk and fixing the premium.

(b) Acceptance:

On receipt of the proposal form, the insurer will assess the risk. Sometimes, when the contents
and subject-matters are not of very high amount, the insurer may accept on the basis of proposal
forms only. When the subject-matters is of larger magnitude and where the hazard involved is of
a variable or unknown nature, the insurer may send his surveyor to survey the property. The
surveyors being expert in the field of insurance evaluation will consider the proposal in the light
of this report. The unknown proposers are required to submit an evidence of respectability. The
insured is required to submit a certificate from some known and respectable person about

6
M.N. Mishra & S.B. Mishra, Insurance Principles and practice, 405 (22nd ed., 2016).
8 | P a g e FIRE INSURANCE CONTRACT
honesty and integrity.7 As soon as the proposal is accepted, the assured is informed about the
decision.

7
Ibid
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(c) Commencement of risk:

The risk commences as soon as the contract is completed provided there is no specific time for
the purpose. As soon as the proposal is accepted, risk will commence irrespective of the fact that
no policy was issued and no premium was paid. Where risks are unknown and tremendous, the
payment of premium will be the basis of the completion of the contract. The risk will commence
only when the premium has been paid and not before that when the policy has been issued,
payment of premium will not be the basis of commencement of risk.8

(d) Cover note:

The insurer issues a 'Cover Note' or 'Interim Protection Note'9 when the risk was accepted
provisionally or subject to the condition of payment of premium. This note will cover the
property so far the final policy has not been issued. If loss occurs before issue of policy the cover
note will be sufficient to prove insurance. The cover note however is not taken at par to the
policy.

Policy:

The insurer issues a duly stamped policy which will bear all the terms and conditions of the
contract. Any contract of fire insurance comes within the meaning of the word 'policy'. It is a
statutory and formal document of insurance contract. There are different forms of policies for
different types of policies. However, a standard form is also used.10 The policy contains the name
and address of the insured, the subject-matter of insurance, the sum insured, the term and the
premium. There are various clauses governing the conditions of insurance contract. The terms
and conditions of the policy can be changed.

Period of Fire Insurance Policies:

Usually fire policies are issued for one year and are called 'Annual Insurance.' Policies issued for
a period shorter than one year are known as 'Short-term Policies' and those issued for a period

8
Supra note, 6.
9
Ibid.
10
Ibid.
10 | P a g e FIRE INSURANCE CONTRACT
more than one year are called 'Long-term Polices'. But in practice only annual policies are
common.

'Short- term' and 'Long-term' policies are rarely used. Long-term policies are generally issued in
case of building. Alteration in the policy will be made according to the change in building and
terms of insurance. The premium rate is determined according to the nature, location,
construction of the property. Moreover, the period of insurance is also taken into account for
computing premiums More than one fire during a Period When there is more than one fire in
respect of the same subject-matter insured, the insurer is not bound to pay more than the sum
assured.11 During the policy-life, payment of each loss, automatically, reduces the amount of the
policy by the amount so paid.

When, after payment of certain losses, the property insured is totally destroyed, the insurer will
pay loss not more than the balance of insured amount remaining after compensation of the
previous losses. However, if the insured is willing to get payment of full loss, he can reinstate the
assured sum to the original amount by paying afresh premium on a pro-rata basis to the date of
expiry.

More than one Policy :

If the same subject-matter is insured with more than one insurer, he cannot realize more than the
actual loss from all the insurers. Each insurer will pay his ratable proportion of loss to the
property insured against fire. If there is average clause, then the insurers will pay accordingly.

INSURABLE INTEREST:

Insurable interest is the general principle of insurance without which insurance cannot lawfully
be enforced for an insurance unsupported by an insurable interest would be a gambling
transaction. Insurable interest will be there where the subject-matter should be in such a position
that the insured may suffer loss at the time of damage and may gain by its protection. The
insurable interest in fire insurance must be present at the time of contract continue throughout its

11
“Fire Insurance. Negligence of Insured. What Constitutes „Loss by Fire.‟” Columbia Law Review, vol. 25, no. 4,
1925, pp. 499–500. JSTOR, www.jstor.org/stable/1114045.
11 | P a g e FIRE INSURANCE CONTRACT
currency and at the time of loss. Insurance contract will be invalid if the property is sold to
another party. Similarly if there is no insurable interest at the time of insurance, the contract will
be invalid. The following conditions must be fulfilled to constitute an insurable interest.

(i) There should be a physical object capable of being damaged or destroyed by fire.

(ii) The object must be the subject matter of insurance.

(iii) The insured must stand in such relationship as recognized by law where the insured is
benefited by the safety of the subject-matter or be prejudiced by its loss. The insurable interest is
the 'pecuniary interest'.

The fire insurance is a personal contract between the insured and the insurer. So, the transfer of
interest would invalidate the contract. The following persons have insurable interest in the
subject-matter concerned.

1. The owner of the property or asset whether fixed or current has as insurable interest whether
he is the legal owner or the equitable owner. The owner may be a single or joint, holder. 'Partial
owner can take policy for full value as trustee of all the property. A Life tenant entitled to the use
of the property during his life time only has an insurable interest.

2. An agent has insurable interest in the property of his principal.

3. A partner has an equitable interest in the firm's property.

4. A creditor has an insurable interest in property on which he has a lien for the debt.

5. An insurer has it in respect of risks underwritten by him for the purpose of reinsurance.

6. Where the subject-matter is mortgaged, the mortgagor has an insurable interest in the full
value thereof and the mortgagee has an insurable interest in respect of any sum due to become
due under the mortgage.

7. A bailed can insure any article or property bailed. He may be a gratuitous bailed or bailed for
reward.

12 | P a g e FIRE INSURANCE CONTRACT

8. A trustee has insurable interest in the property put on trusteeship.

PRINCIPLE OF GOOD FAITH:

The contract of fire insurance is one in which the observance the utmost good faith-uberrima
fides-by both the parties are of vital significant.12 The utmost good faith in fire insurance has two
aspects-first, disclosure of material facts and second, preservation of the property insured.

The insurer and the insured must furnish detailed information regarding the subject-matter to be
insured. The insured, since he has more, information about the subject-matter, must disclose all
the information asked truly and fully. The, assured is also required to disclose all the material
information which are known to him although it was not asked by the insurer; material fact is
one which influences the decisions of the insurance. The decision may be pertaining to the
acceptance or declination or determination of the premium. In case of fire insurance the
examples of material facts are construction of buildings. If the assured has not observed good
faith, the contract can be avoided by other party. It was immaterial to plead that the insured was
unaware of the fact and could not disclose.

In a given circumstance, it is expected from the insured to-know all the material facts. The
insurer has also to disclose such material facts as are within his knowledge. The second phase of
good faith is preservation of property. Thus, the observance of good faith is necessary not only
during the negotiations of the contract but throughout the term of the policy and in making
claims. Any change after commencement of risk must be communicated to the insurer. The
insured or his agents as well as the insurer must take all such steps as may be reasonable for
averting or minimizing loss. Since the insured is near to the property, he must act to prevent the
fire and if fire occurred, he must do his utmost to extinguish it. In such cases he must act as if he
was not insured.

Exceptions :

In the following circumstances, the insured is not required to disclose information.

12
Supra note 6.
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1. All those circumstances which diminish the risk.

2. All those facts which are known or reasonably presumed to be known to the insurer.

3. Information which are of common knowledge.

4. Those facts which the insurer in the ordinary course of his business ought to know or which
the insurer ought reasonably to have inferred from the details given.

5. Those facts which are superfluous to disclose by reason of a condition or warranty.

PRINCIPLE OF INDEMNITY:

The doctrine of indemnity aims to compensate the insured for a loss sustained, and the
compensation should be such as to place him as nearly as possible in the same pecuniary position
after the loss as he occupied immediately before the occurrence. The insured cannot claim
anything in excess of the amount required to recoup the actual loss sustained.13 The insurers
undertake to make good the insured's loss by monetary payment or by reinstatement or
replacement so that the insured shall be fully indemnified, but this is subject to the sum insured.
The law does not sanction any insurance which would enable the insured to profit by the
destruction of the thing destroyed. It will check the temptation to destroy the property insured
thereby to secure the money. The assured amount is not the measure of indemnity but it sets an
upper limit up to which the loss can be indemnified.14 The actual amount of indemnity will be
the market value of the subject- matter destroyed or damaged by fire at the time and place of the
occurrence of fire. It will never exceed the assured amount.

When the actual loss is more than the assured amount then only the insured sum will be paid and
nothing more is paid. But, this principle does not hold well when the policy is valued policy.
Here, the basis of indemnity will not be the actual cash value of the property at the time of loss
but the insured value which is named in the policy when it was taken. In a valued policy, no

13
R. A. S. “Insurance: Concept of Indemnity as Limiting Recovery on Fire Insurance Policies.” Michigan Law
Review, vol. 32, no. 4, 1934, pp. 529–538. JSTOR, www.jstor.org/stable/1281439.
14
Ibid.
14 | P a g e FIRE INSURANCE CONTRACT
consideration is given to the actual loss.15 Thus, the amount of claim may be greater or less than
the actual loss at the time of fire in case of valued policies.

INTERPRETATION OF INDEMNITY

The insured is entitled to perfect indemnity subject to the sum assured being sufficient. But, in
practice such perfection may be difficult to attain. Previously, the meaning of the word
'indemnity' was understood in the sense of material indemnity only, i.e., tangible and material
property only. The intangible loss, i.e., loss of profit, rent, etc. was not compensated. It worked
as a great hardship to the honest insured persons. Now, the insurance is extended to cover not
only the material loss of property insured but also to cover the 'consequential loss'.

When a business property is burnt, not only the material loss on account of the destruction of
building, plant and stock are covered but the consequential loss of profits on account of cessation
of sales, salaries, taxes, rent, rates, etc., are also indemnified. Now a day's tangible and intangible
losses are insured and the consequential loss is also within the meaning of indemnity.

15
Ibid.
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 CHAPTER 4: TYPES OF FIRE INSURANCE POLICIES

SPECIFIC POLICY
It is a policy which covers the loss up to a specific amount which is less than the real value of the
property. The actual value of the property is not taken into consideration while determining the
amount of indemnity.16 Such a policy is not subject to 'average clause'. 'Average clause' is a
clause by which the insured is called upon to bear a portion of the loss himself. The main object
of the clause is to check under-insurance, to encourage full insurance and to impress upon the
property owners to get their property accurately valued before insurance. If the insurer has
inserted an average clause, the policy is known as "Average Policy".

COMPREHENSIVE POLICY
It is also known as 'all in one' policy and covers risks like fire, theft, burglary, third party risks,
etc. It may also cover loss of profits during the period the business remains closed due to fire.

VALUED POLICY
It is a departure from the contract of indemnity. Under it the insured can recover a fixed amount
agreed to at the time the policy is taken. In the event of loss, only the fixed amount is payable,
irrespective of the actual amount of loss.

FLOATING POLICY
It is a policy which covers loss by fire caused to property belonging to the same person but
located at different places under a single sum and for one premium. Such a policy might cover
goods lying in two warehouses at two different locations. This policy is always subject to
'average clause'.

REPLACEMENT OR RE-INSTATEMENT POLICY

It is a policy in which the insurer inserts a re-instatement clause, whereby he undertakes to pay
the cost of replacement of the property damaged or destroyed by fire. Thus, he may re-instate or
replace the property instead of paying cash. In such a policy, the insurer has to select one of the

16
Supra note 3.
16 | P a g e FIRE INSURANCE CONTRACT
two alternatives, i.e. either to pay cash or to replace the property, and afterwards he cannot
change to the other option.

17 | P a g e FIRE INSURANCE CONTRACT

 CONCLUSION
Previously there was no basis on which the premium could be based. There were a few concerns
which made a remarkable progress. Gradually as they gained experience the data went on
accumulating and the premium rates became more equitable and scientific. The decisions of law
court also brought the principles of fire insurance a standard form. With increasing competition
and experience, the fire insurance is evolved in its present scientific form. However, the progress
in fire insurance was not so tremendous and categorical as was in the case of life insurance.

The business of effecting, otherwise than incidentally to some other class of insurance business,
contract of insurance against loss by or incidental to fire or another occurrence customarily
included among the risks insured against in fire insurance policies. The occurrence of a fire will
result not only in the loss of or damage to material property but also other consequential losses
such as loss of production causing loss of profit.

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 BIBLIOGRAPHY

SECONDARY SOURCES:

BOOKS

 M.N. Mishra & S.B. Mishra, Insurance Principles and practice, 405 (22nd ed., 2016).

JOURNALS

 R. A. S. “Insurance: Concept of Indemnity as Limiting Recovery on Fire Insurance

Policies.” Michigan Law Review, vol. 32, no. 4, 1934, pp. 529–538.
 “Fire Insurance. Negligence of Insured. What Constitutes „Loss by Fire.‟” Columbia Law
Review, vol. 25, no. 4, 1925, pp. 499–500. JSTOR.
 “Insurance. Fire Insurance. Subrogation of Insurer.” Virginia Law Review, vol. 3, no. 1,
1915, pp. 78–79. JSTOR.

WEBSITES/URLS /BLOGS

 www.lawteacher.com
 www.investopedia.com
 www.scconline.com
 www.manupatra.com
 http://www.preservearticles.com/2012041130254/get-complete-information-on-fire-
insurance-contract.html
 https://archive.india.gov.in/business/manage_business/fire_insurance.php
 https://iedunote.com/fire-insurance-principles
 https://www.investopedia.com/terms/f/fire-insurance.asp
 http://priyankablogthoughts.com/fire-insurance-in-india-types-of-fire-insurance-policies/

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