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Fire insurance contract may be defined as "an agreement, whereby one party in return for a consideration undertakes to indemnify the other party against financial loss which the latter may sustain by reason of certain defined subject-matter being damaged or destroyed by fire or other defined perils up to an agreed amount."
The party responsible to indemnify the loss is called the insurer, the party who is to be indemnified is called the insured, the consideration for the contract is termed 'the premium', the defined subject-matter is termed 'the property insured" the sum set forth in the contract is called the assured sum, and the document containing the terms and conditions of the contract is known as 'the policy.
The contract of insurance involves all the elements of an ordinary contract and insurance contracts. The elements of contract are discussed in following paragraphs.
Before discussing the elements of the fire insurance contract, the special meaning of the 'Fire' must be understood.
Fire, in order to make the insurer liable under the contract, must satisfy two conditions. First, there should be actual fire or ignition, and second, the fire must be for tuitions in its nature.
The expression in the policy we have to construct is loss or damage occasioned by fire. This means that loss or damage must be either by ignition of the article or property or premises or part thereof. In other words, the damage should be occasioned by fire.
Loss or damage caused by excessive fire heat cannot be included in 'loss or damage by fire'. If should be proved here, that the loss should be caused by fire.
The cause of fire is not important. The fire even if caused by the negligence of the servant or himself may come under the definition of fire. There should be no fraud or willful misconduct by the assured. There should be actual ignition but a process resembling fire may not be fire.
For example, the damage done due to smoke due to faulting chimney, or overheated iron are not the example of fire. Similarly chemical actions, explosion, lighting, etc. are not occasioned or example of fire.
Fire should be accidental and not intentional:
Any loss caused by fire lighted purposively is not a loss by fire if it was intentional. However, the property burned accidentally in an ordinary fire, such as domestic fire, the loss is covered even if the fire remains under control.
When a fire was purposively lighted but became out of control at a later stage is taken under the definition of fire. The object of fire insurance is to indemnify the insured against accidental loss by fire.
Elements of Fire Insurance Contract:
1. Features of General Contract:
All the features of general contract are also applicable to the fire insurance contract. Such as proposal and acceptance, consideration, agreement between the parties, legal competence of the parties and legal venture.
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. 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.
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 honesty and integrity. As soon as the proposal is accepted, the assured is informed about the decision.
(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.
(d) Cover note:
The insurer issues a 'Cover Note' or 'Interim Protection Note' 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.
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.
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 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. 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.
2. 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 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.
8. A trustee has insurable interest in the property put on trusteeship.
3. 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. 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 minimising 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.
In the following circumstances, the insured is not required to disclose information.
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.
4. 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.
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. 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 consideration is given to the actual loss.
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.