The Standard Fire and Special Perils Policy and Insurance of Material Damage; Consequential Loss Insurance Fire insurance has been described in the Insurance Act as contracts of insurance against losses caused by fire or certain associated perils. The business is divided into two main types, or "lines,' called (1) ‘Material Damage' insurance and (2) 'Consequential Loss' insurance.
Material Damage - the Standard Fire and Special Perils Policy
This line of business is concerned with the insurance of property against physical destruction by the fire group of perils.
Buildings Machinery Material Damage FFF SFSP Policy Stock-in-Process Stock-Open-Godowns Fire Insurance Declaration Policy Floater Policy Floater Declaration CLI Policy Consequential Loss
Figure 16: Fire Insurance Types of Policies
Types of Policy: The 'Standard Fire and Special Perils Policy, or SFSP Policy, is the only product offered in this category, but through the option to select Additional Covers, also called 'Add-ons, it can be customized to take care of all types of requirements.
The SFSP Policy can be issued to insure a variety of 'Exposures, but which Industry insiders often refer to a frisks, ranging from Dwellings, Hotels and Restaurants, Shops and Commercial Establishments, Industrial and Manufacturing Enterprises, Utilities, Godowns and Open Storages. At any of these locations the assets which can be included under the policy are (1) Buildings (2) Plant and Msachinery (3) Furniture, Fixtures, Fittings, Merchandise, Personal Effects, etc. (4) Stock -in - Process (5) Stocks in Godowns or in Open Storage.
The SFSP Policy is meant to be usually issued for a Sum Insured, or value, which is treated as fixed for the duration of cover. However, to deal with situations where there is fluctuation in the quantity and value of stocks at multiple locations, customized variants can be issued such as (1) Declaration Policy, which specifies the maximum value for each location, but accepts a monthly declaration of actual values to derive the annual average value at risk (2) Floating Policy, which does not specify the Sum Insured for individual locations, but treats it as representing the cumulative value at risk for all location (3) Floater Declaration Policy, which combines the features of both Declaration and Floating policies. It does not specify the value per location while using monthly declarations to calculate Average value for each location. It must be stressed that these variants are available only for insurance of Stocks held in godowns or kept in open, and not for Stock-inprocess.
Duration (Period of Insurance): This policy is usually issued issued for an annual period, but can also be issued for shorter durations, when it is commonly called a 'Shortperiod' policy. Some insurers also issue policies insuring Dwellings for longer durations up to ten years.
Sum Insured: The Sum Insured, or value for insurance, must be chosen by the Proposer. For Buildings, Machinery, Furniture Fixture and Fittings the basis of valuation can be ‘Market Value' or 'Reinstatement Value, but Stocks can only be insured for their 'Market Value. Premium must be paid in full before the policy is issued, and the cover commences at a date or time of choice of Insured but after the premium has been paid in full.
Market Value can be easily understood as that value at which an asset of similar condition and age would be commonly bought or sold at a time prior to the occurrence of loss. In other words, the cost of a similar new asset should be reduced by depreciation for its age and condition.
SFSP Policy Building Machinery Reinstatement Value Market Value FFF, Contents Stock-in-Process Stock-Godowns or Open
Figure 17: Fire Insurance - Basis for selection of Sum Insured - Market Value and Reinstatement Value
Reinstatement Value is the amount at which a new asset of the same type and capacity can be purchased or constructed as calculated post-loss on the date on which it occurred.
roverage: The SFSP policy offers protection against twelve perils as a standard or fixed package, out of which the five most significant are
(1) Fire (2) Lightning (3) Explosion/ Implosion (4) Riots, Strike, and Malicious Damage (5) Storm, tempest, tornado, typhoon, cyclone, hurricane, flood and inundation.
Additional Coverage: There are fifteen additional covers to choose from, the three most popular Add-ons are (1) Earthquake (Fire and Shock) (2) Terrorism Damage (3) Spontaneous combustion.
Exclusions: The Policy also excludes some perils, most noteworthy of which are (1) Burglary, housebreaking, theft (2) War (3) Nuclear Radiation or Explosion (4) Consequential losses such as Loss of Profits, Markets or Goodwill (5) Burning of insured property on the orders of a Public Authority
The SFSP policy, with its add-ons and variants, has stood the test of time in being able to provide a solution for all requirements of fire insurance against material damage.
Fire (Consequential Loss) Insurance
The SFSP policy offers protection against physical loss or destruction of property, and covers the expenses for repairing or replacing it. However, when such a loss occurs, then a Business Enterprise also suffers financial losses due to the interruption, retardation or cessation of its business processes.
The Fire (Consequential Loss)
Insurance policy offers protection against financial losses resulting from a loss caused by Fire or other perils insured under a SFSP policy. The two policies go together, and the CLI policy is granted only if an SFSP policy is also taken at the same time. A loss under the CLI policy is payable only if it results from a loss for which liability has been admitted under the SFSP policy.
Coverage: The CLI policy covers (1) Loss of gross profit due to reduction in turnover or output (2) Increased cost of working which is the additional expenditure incurred to avoid or minimize the reduction in turnover. Here the Gross Profit signifies the sum of the Net Profit and Standing Charges, the Net Profit being the Net Trading Profit and the Standing Charges being those fixed expenses which are necessarily incurred and which do not decrease in proportion to a reduction in Turnover.
Additional Coverage: On payment of additional premium the policy can be extended to cover several losses, out of which noteworthy are loss due to (1) failure of Public supply of Electricity, Gas or Water supply (2) Material
Damage loss at Supplier's premises (3) Material Damage Loss at Customer's premises
Exclusions: The policy excludes several types of losses, the most important of which are those arising out of (1) War and allied perils (2) Nuclear reactions and radiation (3) Loss of Goodwill and Loss of Market (4) Third Party Claims, Contractual Penalties and Fines (5) Material Damage Losses not admitted under the SFSP policy
Sum Insured: First, an Indemnity Period should be chosen. This is the period estimated to put the business back into its normal position, and could be any period from 6 months to 3 years. This is the period during which the financial loss is experienced. The Sum Insured chosen should be equal to the Gross Profit representing the Indemnity Period Chosen. So, if an Indemnity Period of one year is chosen, then the Sum Insured should be equal to the Gross Profit for One year. The Sum should be adjusted to account for estimated Increased Cost of Working.
In conclusion it must be stressed that both the SFSP Policy and the CLI Policy offer sufficient options to provide adequate solutions for all insurance requirements.
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