Concept of fire insurance policy
A fire insurance policy is a contract in which the element of indemnification is applied. The fire insurance policy is issued for one year and on the request of the policyholder it is renewed every year. If, within the insured period, the property is damaged or lost due to fire, only then it will indemnified up to the loss not exceeding the insured amount. further, the risk coverage is wider in fire insurance to cover any loss caused by fire which is accidental and unintentional.
In order to receive indemnity in fire insurance two conditions must be fulfilled; first, there must be ignition of actual fire and secondly, the fire must be accidental, not intentional.
Types Of Fire Insurance Policy
On the basis of risks covered, values of properties and kinds of indemnity provided, the fire insurance policy can be classified into the following types:
1. Types of fire insurance policy on the basis of risk covered
On the basis of coverage of risk, the fire insurance policy can be divided into the following three types:
i. Comprehensive policy
A fire insurance policy is called comprehensive policy when it covers other risks of loss caused by burglary, riots, arson, civil commotion, explosions, civil war, accidents and others in addition to the risk of loss caused by fire in one single policy.
ii. Blanket policy
A fire insurance policy in which a single policy is used to insure properties located at one or different locations against the risk of fire is called blanket policy. The insured may have different properties at different locations. If one policy is take for all the properties located at different places, its is called blanket fire insurance policy.
iii. Consequential loss policy
A consequential loss fire insurance policy is meant for indemnifying the loss caused not directly by fire but incidental to the event of fire. Under this type of fire insurance policy, the insurance company not only compensate the loss caused by fire, but also other indirect losses such as loss of net profit due to expenses like salaries, interest, increased cost of advertising and hiring of temporary premises.
2. Types of fire insurance policy on the basis of indemnity
On the basis of indemnity and coverage, fire insurance policy can be divided into following types:
i. Valued policy
A fire insurance policy is valued when the insured amount payable as indemnity to the policyholder is valued at the outset while issuing the policy.
ii. Valuable policy
Contrary to valued policy, valuable fire insurance policy is one in which the amount to be indemnified is valued after the event of fire. In this type of fire insurance policy, property is not valued at the time of taking policy. It is valued later when the incidence of fire occurs and damage is caused.
iii. Average policy
The fire insurance policy, which is termed with the average clause in its indemnification is called average policy. Under this policy, the insurer does not undertake to indemnify the actual loss if the insured property is under-insured. Rather, it is the average value of the actual loss relative to the actual value of the property insured, which is paid by the insurance company as compensation.
iv. Specific policy
Like the average policy, a specific fire insurance policy defines the risk coverage when under-insurance takes place. It is a policy in that it undertakes to indemnify the actual loss only within the extent of value insured.
v. Reinstatement policy
Under a reinstatement policy, the insurance company undertakes to replace the property damaged by fire. In this policy, the actual loss is not indemnified in monetary terms but insured goods or property is replaced.
3. Types of fire insurance policy on the basis of value of stock
The fire insurance policy can be divided into the following types on the basis of value of stock:
i. Floating policy
A floating policy is one by which one or several kinds of goods lying at different locations are insured under one policy and fore one premium.
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ii. Excess policy
An excess policy is supplementary fire insurance policy, which is purchased to cover additional risks beyond the coverage of original first loss policy. In such a case, a first loss policy is purchased for minimum stock value and additionally an excess policy is purchased for an anticipated increase in the total value of stock. This fire insurance policy is purchase by such merchants whose stocks fluctuate from time to time.
iii. Declaration policy
This fire insurance policy is issued for the maximum value of stock to be insured. At the beginning of contract, three-fourths of the premium payable is charged from the insured in advance. Every month, the policyholder is required to declare the value of present stock. In case of loss by fire, the compensation is made on the basis of the declared value. At the end of the insured period, based on the values of stock declared, the total of premium payable is worked out as average.
