Standard Fire and Special Perils Insurance Policy – Definition, Coverage, Exclusions, Types, Add-On Covers, Principles, Cost, Companies, Claim Process, Quotes

What is a Standard Fire and Special Perils Insurance Policy?

A Standard Fire and Special Perils Insurance Policy (also known as a Fire Insurance Policy) is a type of Property Insurance which provides reimbursement for Loss or Damage to the insured assets because of Fire and allied perils. A Fire Insurance Policy pays for the cost to replace or repair the damaged assets. The Policy is thus essentially a form of Property Insurance which covers fire-related damage.

A Standard Fire and Special Perils Insurance Policy can cover Buildings, Plant & Machinery, Stocks, Furniture, Fixtures and Fittings where the Total Value at Risk across all Insurable Asset Classes at one location exceeds Rs50 Crores.

What are the coverages under a Fire Insurance Policy?

A Fire Insurance Policy in India offers coverage against Loss or Damage to the Insured Assets because of the following Perils:

1. Fire
2. Lightning
3. Explosion /Implosion
4. Aircraft Damage
5. Riots, Strikes and Malicious Damage
6. Impact Damage
7. Subsidence and Landslide including Rockslide
8. Bursting and/ or Overflowing of Water Tanks, Apparatus and Pipes
9. Missile Testing Cover
10. Leakage from Automatic Sprinkler Installations
11. Bushfire
12. Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and Inundation

What are the Exclusions under a Standard Fire and Special Perils Insurance Policy?

A Fire Insurance Policy does not cover losses due to the following:

1. Loss or Damages caused due to War or Related Perils
2. Loss or Damages caused due to Nuclear Perils
3. Loss or Damages caused due to Pollution
4. Loss or Damage to Stocks in Cold Storage Premises due to change in temperature
5. Loss or damage to any electrical machine due to Overrunning, Short-Circuiting, or Leakage of Electricity from whatever cause (Lighting included).

What are the different types of Standard Fire and Special Perils Policies?

The different types of Fire Insurance Policies are as follows:

1. Stock Declaration Policy: A Stock Declaration Policy is issued when there are frequent changes in stock value during the currency of the policy. The Insured has to make monthly declarations of stock values based on the average of the values at risk on each day of the month or the highest value at risk during the month latest by the last day of the succeeding month. The Policy allows a maximum refund of 50% of Premium if the Declared Sum Insured is less than the Policy Sum Insured.
2. Floater Policy: A Floater Insurance Policy is issued when inventory stocks are stored at different locations. The Insured has to declare only a single Sum Insured for stocks stored at all locations and there is no need to declare separate value of stocks at each location.
3. Average Policy: An Average Policy has an Average Clause attached to the Fire Insurance Policy and this clause comes into play when the Insured has underinsured the property by declaring a lower Sum Insured than the actual value of the property which is to be insured. In such a case, the Fire Insurance Company will only pay a pro-rata claim amount at the time of a claim.
4. Agreed Value Policy: Some assets are hard to value and, in such cases, the assets are insured under an Agreed Value Policy where the value of the goods to be insured is pre-decided and this is the value that the Insurance Company will be liable to pay if the Insured good is damaged or destroyed. Agreed Value Policy is issued only for Properties whose market values are difficult to determine such as Artworks, Curios, Manuscripts or obsolete machinery.

What are the Add-On Covers available in a Fire Insurance Policy?

The Insured can enhance the Fire Insurance Policy coverage by opting for the following Add-On Covers:

1. Removal of Debris Cover (in excess of 1% of claim amount): The Removal of Debris Add-On Cover covers the costs of clearing debris from the Insured Premises as well as the cost of dismantling or demolishing; or shoring up or propping of the portion of the Insured Property damaged by Insured Perils.
2. Omission to Insure, Additions, Alterations or Extensions: The Omission to Insure Addition, Alteration, or Extension Add-On Cover provides automatic Fire Insurance Coverage to new fixed assets like Buildings, Plant & Machinery and other Contents which the Insured has erected or acquired after Policy Commencement and the same has not been separately declared in the Policy. This extension does not provide coverage to those fixed assets which were erected and existed prior to Policy Commencement buy only those assets which were erected after Policy Commencement.
3. Architects, Surveyors and Consultant’s Fees (in excess of 3% of Claim amount): The Architects, Surveyors and Consultant’s Fees Extension provides cover for expenses incurred towards Architects, Surveyors and Consulting Engineers fees for plans, specification tenders, quantities and services for the Reinstatement for the Building, Machinery, Accessories and equipment insured under the Fire Insurance Policy.
4. Escalation Clause: Escalation Clause in a Fire Insurance Policy provides an automatic pro-rata increase in the Policy Sum Insured in respect of capital assets from Policy Inception to Expiry. The Policy Sum Insured is increased each day by 1/365th of the specified percentage increase per annum. The Escalation Clause takes care of rise in value of Fixed Assets due to Inflation.
5. Spoilage Material Damage Cover: Spoilage Material Damage Cover provides coverage to loss of Stock-in-Process and Damage to Machinery or Equipment due to retardation, interruption or cessation of any process or operation caused by Insured Perils.
6. Leakage and Contamination Cover: Leakage and Contamination Extension pays for the Loss of Oil or Chemical due to Accidental Leakage or Contamination. The Insured has an option to choose to cover accidental leakage OR to cover accidental leakage and contamination both together.
7. Spontaneous Combustion Cover: Spontaneous Combustion Cover provides coverage for Loss or Damage to the Insured Property caused by its own fermentation, natural heating or spontaneous combustion which is an exclusion under a Standard Fire and Special Perils Insurance Policy.
8. Fire Fighting Expenses: The Fire Fighting Expenses Add-On Cover pays the actual cost of material used or damaged in extinguishing or controlling a fire as well as the expenses incurred to recharge/refill any fire protection devices.
9. Shutdown/ Startup Costs: Shutdown/ Startup Expenses Add-On Cover pays for the start-up / shut-down costs incurred for power and utilities such as electricity, water, steam, gas, fuels or combustibles to re-establish the plant in the operational state.
10. Claim Preparation Costs (not exceeding 1% of the final claim amount): The Claim Preparation Costs Add-On Cover pays costs reasonably incurred by the Insured in producing and certifying any details in support of any admissible claim

What are the Principles of a Fire Insurance Policy?

A Fire Insurance Policy works on the following principles:

Principle of Insurable Interest

Insurable Interest means that a person benefits from the continued presence of the asset or is prejudiced by the loss of the subject-matter. Principle of Insurable Interest in a Fire Insurance Policy means that the Insured can insure only those assets which he benefits from. Insurable Interest must exist at the time of purchasing the Fire Insurance Policy, during the currency of the Policy as well as at the time of loss.

Principle of Utmost Good Faith

Principle of Utmost Good Faith or Uberrimae Fidei is an important principle of Fire Insurance which means that all parties to an Insurance Contract must make a complete declaration of all facts that are material for accepting or declining the Fire Insurance Proposal. The Insured has a duty to disclose all material facts and not conceal, misrepresent, or withhold any material facts which might change the decision of the insurance company to accept or reject the risk proposal.

Principle of Proximate Cause

Proximate Cause or Efficient Proximate Cause is the dominant risk factor in the chain of causation which has caused the loss. It need not be the initiating or last act in the chain of events. Proximate Cause needs to be identified when 2 or more causes are responsible for the loss. In that case, the Proximate Cause or the dominant factor which has caused the loss needs to be determined. If the Proximate Cause falls within the Perils named in a Fire Insurance Policy, the claim is payable. If the Proximate Cause does not fall within the Perils named in a Fire Insurance Policy or falls within the exclusions in a Fire Insurance Policy, the claim is repudiated.

Principle of Indemnity

The Principle of Indemnity in a Fire Insurance Policy aims to place the Insured in the same financial position after the loss as the Insured was in before the occurrence of the loss. As per the Principle of Indemnity, the Insured is not allowed to make a profit from his Insurance Policy.

Principle of Subrogation

Principle of Subrogation allows the Insurance Company to recover losses from a negligent third party after it has paid the losses to the Insured Party. The Principle of Subrogation places the Insurance Company in place of the Insured, allowing the Insurance Company to pursue all rights and remedies available to the Insured to recover his losses. Additionally, the Insurance Company is allowed to recover losses only after payment of the claim to the Insured, and any excess amount that the Insurance Company receives should be remitted back to the Insured.

Principle of Contribution

Principle of Contribution in a Fire Insurance Policy means that, if an Insured has 2 or more Policies covering the same subject-matter at the same time, then the Fire Insurance Company will pay the losses on a pro-rata basis in case of a Claim. The Principle of Contribution prevents the policyholder from profiting from his Insurance Policy by insuring the same subject-matter under multiple Fire Insurance Policies.

What is the Cost of a Fire Insurance Policy?

The Cost of a Standard Fire and Special Perils Insurance Policy depends on the following factors:

1. Sum Insured: Sum Insured is an important factor which impacts the Premium of a Fire Insurance Policy. Higher the Sum Insured higher will be the cost of a Fire Insurance Policy.
2. Risk Occupancy of the Property: The Nature of the Property being Insured also impacts the premium of a Fire Insurance Policy. A Residential House will have a lower Fire Insurance Premium than a Fire Insurance Policy for a Chemical Factory, all other factors remaining the same.
3. Location of the Property: The Location of the Property also impacts the Premium of a Fire Insurance Policy. Property in an Earthquake Prone Zone will have a higher premium than a Property in a Non-Earthquake Prone Zone.
4. Add-On Covers: Policyholders can opt for Add-On Covers to enhance Policy Coverage. These add-On Covers like Earthquake, Storm Flood and Inundation Cover (STFI Cover) are granted on payment of additional Premium. Opting for Add-On Covers will increase the Premium of a Fire Insurance Policy.
5. Past Claims History: The Past Claims Experience also affects the cost of a Fire Insurance Policy. Fire Insurance Policies with past Claims will have higher Premiums than Policies with No Claims.

How to fix Sum Insured under a Standard Fire and Special Perils Insurance Policy?

There are 2 methods to calculate Sum Insured for a Standard Fire and Special Perils Insurance Policy:

1. Reinstatement Value Method (RIV Method)
2. Market Value Method

What is the Reinstatement Value Clause in a Fire Insurance Policy?

Reinstatement Value Clause in Fire Insurance Policy is a method of insuring assets at their Reinstatement Cost or Replacement Cost rather than their Depreciated Value in a Fire Insurance Policy. In case of a claim, the Insurance Company pays the Reinstatement Cost of replacing the damaged asset with a new asset under the Reinstatement Value method. This implies that no depreciation is levied on the property value. RIV method is applicable only to fixed assets and not to stocks and contents.

What is the Market Value Method to declare Sum Insured in a Fire Insurance Policy?

Under the Market Value Method, the Insured declares the Sum Insured of the Asset based on their Market Value after deducting depreciation. In case of a Claim, the Insurance Company pays the Depreciated Value (Current Market Value) of the Insured Property under the Market Value method. Here, depreciation is levied on the asset depending upon its age.

What is Underinsurance in a Fire Insurance Policy?

Underinsurance in a Fire Insurance Policy refers to a situation where the Insured underinsures the property by declaring a lower Sum Insured than the actual value of the property. Underinsurance is the discrepancy between the Policy Sum Insured and the Actual Value of the Property. As a result, the Insurance Company is denied its rightful premium since it charges a premium on the lower Sum Insured which is declared.

Thus, Fire Insurance Policies have an Average Clause attached which applies when the Property is Underinsured at the time of purchasing the Fire Insurance Policy. Under the Average Clause, the Insurance Companies apply a deduction factor to the claim amount based in the Degree of Underinsurance. In case of Underinsurance, the Insurance Company penalises the Insured in case of a Claim by deducting the claim amount on a pro-rata basis.

For example: If an Insured has declared the property value of Rs50,000 to the Insurance Company when the actual property value was Rs100,000, then, in the case of a Claim of Rs20,000, the Insurance Company pays only 50% of the claim amount ie Rs10,000 since the Insured had underinsured the property value to the tune of 50%. Thus, the Insurance Company pays the Claim in the same proportion as the Sum Insured with the Cost of the Insured Property in case of Underinsurance.

Which Insurance Companies offer a Fire Insurance Policy?

The list of Insurance companies providing a Factory Insurance Policy in India are as follows:

1. New India Assurance Company
2. Oriental Insurance Company
3. National Insurance Company
4. United India Insurance Company
5. Bajaj Allianz General Insurance Company
6. ICICI Lombard General Insurance Company
7. SBI General Insurance Company
8. Tata AIG General Insurance Company
9. HDFC Ergo General Insurance Company
10. Future Generali General Insurance Company
11. IFFCO Tokio General Insurance Company
12. GoDigit General Insurance Company

What is the Claims Process in a Fire Insurance Policy?

Once the Insured Property has been damaged in a Fire, the Insured needs to follow the below steps to file a claim under a Fire Insurance Policy:

1. Claim Intimation: Once there is a Fire Damage at the Insured Property, the Insured should intimate the claim as soon as possible to the Insurance Company. The Insurance Company will register a Claim. The Insured Party must provide details like Date, Time and Location of the Fire Incident, Loss or Damage to Assets, Brief Description of the Fire Accident, while registering a Claim.
2. Surveyor Appointment: The Insurance Company appoints a surveyor who visits the affected site for investigation.
3. Document Submission: The Insured needs to submit the documents required for a Fire Insurance Claim such as ID Proofs, GST Certificate, Claim Form, FIR Reports, Report of Damaged Assets etc.
4. Claim Assessment and Settlement: The Insurance Company assesses the Claim based on Documents submitted and Surveyor Reports. If the Claim is admissible, the Insurance Company settles the Claim as per the Fire Insurance Policy Terms and Conditions

What are the Documents required to make a Claim under a Fire Insurance Policy?

The Insured needs to produce following documents to the Fire Insurance Company to make a claim under the Fire Insurance Policy:

1. A Copy of the Fire Insurance Policy
2. Duly filled Fire Insurance Claim Form
3. Photographs of the Damaged Site
4. Forensic reports
5. Fire brigade report (mandatory in case of fire)
6. Investigation report
7. Police FIR Report
8. Invoice copies of all damaged assets
9. Fixed Asset Register maintained for balance sheet
10. Stock Register
11. Estimated cost of repair or replacement

What types of Assets can be insured with a Fire Insurance Policy?

All types of assets can be insured with a Standard Fire and a Special Perils Policy. Most commonly, a Fire Insurance Policy is taken out for the following types of assets:

1. Fire Insurance for Factories (Plant & Machinery, Building, Inventory)
2. Fire Insurance for Residential or Commercial Property Building,
3. Fire Insurance for Stocks and Inventory
4. Fire Insurance for Furniture, Fixtures and Fittings etc

Get the Best Quotes for Fire Insurance Policy with Qian!

Fire Related accidents are all too common for business disasters. A small short–circuit or an explosion can destroy huge factories and buildings and result in losses of crores of rupees. It can easily destroy years of savings and set your business back by years. Moreover, after a fire incident, you would require substantial investments to resurrect your business. These investments will be required precisely at a time when you are stretched for resources as your business has been destroyed by a fire. That is why it is always a wise idea to insure your property with a Fire Insurance Policy. Qian is a leading Insurance Broker for Fire Insurance Policies. The team of experts at Qian have wide experience in assisting clients across diverse industries for their Fire Insurance requirements. Qian can assist you with risk inspection surveys for your property which would recommend the best practices so that the fire risk is minimised at your property. If you wish to purchase a Fire Insurance policy to secure your property, reach out to us at insurance@qian.co.in or or call us at 📞 022-35134695 . We would be glad to assist you!

FAQS about Standard Fire and Special Perils Insurance Policy