Types and Features of Fire Insurance

Fire accidents are devastating and can result in huge losses for businesses. We often hear in news that large and extreme losses have been incurred by business owners on account of accidental fire in metro and non-metro cities. Losses due to natural perils like flood and earthquake are also not uncommon with damage so severe in many cases that the business cannot resurrect of its own.

Standard fire and special perils policy is a great option for business person, which protects the business from not only fire but a large number of other perils as per the terms and condition of the policy. In addition if loss of profits policy is opted with this insurance it may save the business consequential losses as well.

It is highly advisable to all small, medium and large businesses to cover their all assets including building, furniture and fixtures, other contents, stocks etc. from fire, other natural and man-made perils. The wordings and rates of fire insurance on which the premium is charged is governed by regulator and other agencies like national reinsurer GIC Re.

Fire insurance coverages: Standard fire and special perils policy is a named peril policy. Some of the perils which are covered under this insurance, either in-built or on payment of additional premium are fire, earthquake, storm/flood/typhoon/inundation, terrorism, Riot/strike/malicious damage etc. In addition to the mentioned risks, loss of gross profits may also be covered with the base policy. Thus we see that it’s a pretty comprehensive product covering a variety of important risks that a business faces under its ambit.

Types of fire policy: Although the policy wording is standard across the industry and there are a few variations which can be granted in a fire policy, we have listed them below:

Floater policy – Floater policy is issued for stocks at different location under a single sum insured. A business may be spread over various locations and there is a great need for a floater policy. In this case the audit system of the business must be transparent enough so that the insurer can determine the risk at any point of time.

Declaration policy – To take care of the frequent fluctuations in stocks and their values this variation of a fire policy is devised. The insured needs to declare the stock value every month which may be highest value at risk during that month or the average of value at risk on each day of the month.

Add on covers – There are a wide range of additional covers and clauses that can be granted with a standard fire policy as per the choice and the need of the insured. Some prominent among them is listed below and discussed in brief.

  • Architect, surveyor and consulting engineer’s fees for reinstatement of the damaged property. Up to 3% of claim amount is covered in the base policy, in excess of 3% of claim amount and up to 7.5% of adjusted loss can be covered as add-on.
  • Removal of debris cost – Up to 1% of claim amount is covered in the base policy and excess of the same has to be covered as an add-on.
  • Detoriation of stocks in cold storage premises due to power failure due to an insured peril strike resulting in disturbed operations at local power station from which insured gets electricity or damage to cold storage insured machinery.
  • Omission to insure additions, alterations or extensions – This is very useful if the insured acquires some building, contents, machinery etc. in the mid of the policy and is unable to immediately declare it. All such articles will be considered insured as per this clause up to 5% of location wise sum insured.
  • Impact damage due to insured own vehicles, forest fire, spontaneous combustion, loss of rent, temporary removal of stocks, leakage and contamination cover, spoilage cover and a few others.
  • The same standard fire and special perils is granted for residential properties and dwelling as a part of householders package policy and for large industries above sum insured of 100 crore as a part of Industrial all risk policy.
  • Business interruption policy is only granted in India if the business is already covered by Fire policy at first instance. This is very useful as gross profit i.e. variable costs plus net profit is covered in case of any damage admissible under the fire policy strikes.

Three of the remarkable features of a standard fire and special perils policy are mentioned below with details

  • Reinstatement value clause – It is granted on building, machinery and contents but not on stocks. In the event of damage of the insured property the basis on which the calculation is done is replacing or reinstating the property with similar property. The sum insured for all the property must be its new erected value and not the older value. There are obviously many terms attached to this clause and one of them states that any work of such replacement must be finished in a time span of 12 months from the date of damage or destruction.


  • Escalation clause – This clause helps in the regular automatic increase in sum insured as per the escalation percentage opted on payment of additional premium. The sum insured increases daily by 1/365 of the sum insured multiplied by the escalation percent opted. This was devised to take care of increasing prices of property throughout the policy period.

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