Get complete information on Insurance Policy Conditions
The policy conditions may be precedent to the contract conditions subsequent to the contract and conditions precedent to liability. The conditions must be fully complied with to make the insurer liable under the contract.
The conditions may be implied or express. Conditions which are set out in the policy are known as express conditions which may be either of general nature and, therefore, printed on the policy or conditions specially designed with reference to a particular contract and are incorporated in the policy.
The implied conditions are not mentioned on the policies but are deemed to be present with reference to the policy.
A. Implied Conditions:
The following conditions are implied conditions in fire insurance.
(a) Existence of property:
The subject-matter of insurance should exist when the policy is affected.
(b) Insured property:
When the fire occurs the property damaged should be the property insured for obtaining claim on the property.
(c) Insurable interest:
The insured must have insurable interest from the time of the commencement of risk up to the completion of the contract.
(d) Good Faith:
The insured must observe good faith towards the insurer. He must disclose all the material facts truly and fully, and should try to prevent the fire and extinguish the fire, if it occurred, with a reasonable care.
The subject-matter of insurance should be described in the policy as to identify it clearly and so define the risk which insurers have undertaken,
B. Express Conditions:
The express conditions in fire insurance are discussed in the following paragraphs.
The policy shall be voidable in the event of misdescription, misrepresentation or non-disclosure of any material facts.
If there is any material misdescription of any of the property insured, the insurer shall not be liable upon this policy so far as it relates to property affected by any such misdescription, misrepresentation or omission. This condition is a reiteration of the implied condition of utmost good faith.
Therefore, if the assured fails to disclose all material facts or be guilty of misrepresentation or misdescription in any way, the policy shall be voidable at the insurer’s option. Under Common Law, a breach of utmost good faith goes to the root of the whole contract.
By virtue of this condition, insurer will limit the avoidance of the contract to that part only of the property affected if risk is divisible into distinct parts.
If the misrepresentation, under good faith, relates to apart of the policy only, it will render the whole contract voidable, for a breach of good faith cuts at the root of the whole contract. According to the condition of misdescription, any misrepresentation, misdescription or omission must be material. Usually all the questions asked in the proposal forms are material.
Therefore, they should he answered correctly and fully. The insurer should be protected in the manner described in this condition should it be subsequently discovered that the insurance has been obtained through an inaccurate statement on the part of the insured.
The insurance contract may be avoided if there is any alteration after the commencement of this insurance. The alteration may be of the following types.
The removal of the insured property without the consent of the insurer makes the contract voidable. If without the consent of the insurer, the property is removed from one place to another, the insurer will no longer be responsible for any loss arising in relation to the property removed.
For example, if the furniture insured has been removed from dwelling house to factory, the risk has increased. In this case, the insured is responsible to inform the insurer who may accept or refuse to cover the furniture in the new place because risk has increased.
Nevertheless the insured is always responsible for informing the insurer whether the risk has increased or not by removal.
(b) Increase in risk:
The alteration may take place where the risk of the insured property has increased. The insurer can avoid the policy in respect of the item altered. However, if the insurer is agreed to continue the contract the charging extra-premium on the increased risk, after getting information of alteration, he can do so.
If the assured has not informed the insurer, the insurer can waive the contract. The insurer usually accommodates the insured either by waiving his right or by charging extra-premium depending on the circumstances.
(c) Change of interest:
Without the consent of the insurer the interest on the insured property cannot be changed. If the interest has been changed, the insurer will cease his responsibility. The assignment or transfer of property, interest thereon and policy will be valid only when it has been made after the express consent of the insurer.
Except the case of change to hazardous or more risky assignment, the insurer generally accepts the proposal of assignment. Without the consent of the insurer, the assignment or transfer will be invalid.
The insurer can accept the assignment or transfer and the interest of the vendor and of the purchaser may remain intact. Now days, by inserting ‘optional memorandum’, the property can be transferred under good faith and the interests of both the parties are protected.
The change in interest is cease able in the case where the property changes on account of will or operation of law. The insurer in this case will be liable though the consent has not been obtained.
The risks which are excluded from the fire policies are called exceptions or exclusions. The exclusions are explained below:
(i) Destruction or damage by explosion (whether the explosion be occasioned by fire or otherwise) except as stated on the face of the policy.
(ii) Goods held in trust or on commission, money, securities, stamps, documents, manuscripts, business books, patterns, models, moulds, plans, designs, explosives unless specially insured by the policy.
(iii) Destruction of or damage to property which at the time of the happening of such destruction or damage is insured by any Marine Policy.
The above exceptions can be covered or modified by payment of extra-premium. The meaning of certain words should be clarified. Damage by explosion is not covered but damage by fire consequent on explosion is covered. Goods held in trust can be insured by the trustee provided he has an insurable interest in them.
The trustee must have some legal liability or reputation at stake for the loss of the goods to create an insurable interest for which he can insure.
Money, securities, documents and business books are practically uninsurable under an ordinary policy for the very nature of them, except that money can be covered up to a certain small amount under a comprehensive policy.
Documents and business books can be insured for the cost of their reinstatement. Some classes of goods when in stock are liable to spontaneous fermentation or heat on account of the internal temperature engendered by compression. There are many heating processes regularly used in trade and in much business.
Such cases are underwritten only on payment of additional premium. Stamps, manuscripts, plants, designs are highly perishable articles, and it is very difficult to assess their values. However, they can be covered by payment of a special rate. Earthquake, riot, civil commotion, foreign enemy, etc., can be covered by payment of a special rate of premium and under special conditions.
The burden of proof that the fire occurred due to excepted perils lies on the insurer. Destruction or damage caused by forest fire are excluded. But bush fire is accidental and is insured. Forest fire can be insured on extra premium.
There are nine exclusion under the fire policy
1. 5% of each and every claim resulting from the operation of lighting /STFT subsidence and landslide including Rock slide
2. Loss or damage caused by war, civil war and kindred perils
3. Loss or damage caused by nuclear risks
4. Loss or damage caused by pollution or contamination.
5. Loss or damage to bullion or unset precious stones
6. Destruction or damage to the stock in cold storage premises caused by change of temperature
7. Loss, destruction or damage to electrical appliances
8. Expenses incurred on Architects, Survey or and Consulting Engineers Fees.
9. Loss of earning, loss by delay, loss of market, or other consequential or indirect loss or damage or any kind some of the above exclusions are covered by payment of extra-premium
4. Fraud always invalidates a contract and the following provision is made in the standard policy.
“If the claim be in any respect fraudulent or if any fraudulent means of devices be used by the insured or anyone acting on his behalf to obtain any benefit under this policy or if any destruction or damage be occasioned by the willful act or with the connivance of the insured of benefit under this policy shall be forfeited.”
The clause clarifies that the fraud would forfeit all the benefits under the policy. It contemplates three eventualities-presentation of a fraudulent claim, use of fraudulent means and acts of willful destruction like arson, etc.
Fraudulent does not necessarily include improper or excessive claims. Fraud cannot necessarily be in case of price. However, it may be in respect of quantities. Excepted property if included under insured properties would amount fraud.
False valuation of insured properties comes under fraud. Incendiaries or arson committed by the insured or by anyone else with his connivance will be fraud and will avoid the policy.
The claim clause runs as below:
The insured shall also give to the insurer all proofs and information with respect to the claim as may reasonably be required together with (if demanded) or statutory declaration of the truth of the claim and of any matters connected therewith. No claim under this policy shall be payable unless the terms of this conditions have been complied with.”
From the Above clause, it appears that the notice of loss is to be given forthwith after its occurrence though details can be given thereafter.
The expenses of claim will be borne by the insured. The insured has to disclose other inferences in respect of the property for the purpose of determining the contribution that may be payable by other insurer.
The insured must give immediate written notice of any destruction or damage and should be followed with a written notice within 15 days of the claim. The time may be extended by the insurer where there is a reasonable case for it.
The insured must furnish all reasonable proofs and information required together with statutory declarations as to the truth of the claim or any matters connected there with.
6. Reinstatement Clause:
The insurer has the option to discharge his liability by reinstating or replacing the damaged property. The cash payment of actual loss is not made under this clause. It needs as below:
If the company elects to reinstate or replace any property, the insured shall, at his own expense, furnish the company with such plans, specifications, measurements, quantities and such other particulars as the company may require and no acts done or caused to be done by the company with a view to reinstatement or replacement shall be deemed an election by the company to reinstate or replace.
The insurer shall not be bound to reinstate exactly or completely, but only as circumstances permit and in reasonably sufficient manner, and in no case shall the insurer be bound to expend more in reinstatement than it would have cost to reinstate such property, as it was at the time of the occurrence of such loss or damage, nor more than the sum insured by the insurer thereon.
If in any case the insurer is unable to reinstate or repair the property thereby insured, because of certain regulations, the insurer may be liable to pay such sum as would be requisite to reinstate or repair such property if the same could lawfully be reinstated to its former condition.
The clause removes the dispute between insured and insurer because the insurer can replace the goods by similar ones without submitting to the stated value given to them by the insured.
The reinstatement is optional with the insurer and not with the insured, but once the former has elected to reinstate or replace he has no right to reverse his decision.
7. Insurer’s Rights after a Fire:
On the happening of any loss or damage to any of the property insured by this policy, the company may:
(a) Enter and take and keep possession of the building or premises where the loss or damage has happened;
(b) Take possession of or require to the delivered to it any property of the insured in the building or on the premises at the time of the loss or damage;
(c) Keep possession of any such property and examine, sort, arrange, remove or otherwise deal with the same; and
(d) Sell any such property or dispose of the same for account of whom it may concern.
The powers conferred by this condition shall be exercisable by the company at any time until notice in Writing is given by the insured that he makes no claim under the policy.
If any claim is made until such claim is finally determined or withdrawn, and the company shall not by any act done in the exercise or purported exercise of its powers hereunder, incur any liability to the insured or diminish their right to rely upon any of the conditions of this policy in answer to any claim.
If the insured or any person on his behalf shall not comply with the requirements of the company or shall hinder or obstruct the company in the exercise of its powers hereunder, all benefit under this policy shall be forfeited.
8. Subrogation :
The clause subrogation reads as below:
The clause is corollary to the doctrine of indemnity. It makes clear that the insured is precluded from obtaining more than the actual loss. When the insurer has indemnified the insured against a loss the insured must transfer all the rights regarding the property damaged. The insured cannot recover from the third party as well as from the insurer more than the actual loss.
However, both the parties can indemnify only up to the amount of loss. The insured is entitled to receive payment from the third party, by reason of negligence of law or agreement. The insurer cannot recover from third party more than the sum paid by him. The excess amount can be retained by the insurer only as the trustee of the insured.
The insurer is entitled to the advantage of every right of the insured whether such right consists in contract, fulfilled or unfulfilled or in remedy for tort capable of being insisted on or already insisted on or in any other right whether by way of condition or otherwise.
The insured is bound to give all necessary facilities to the insurer which the latter may require in enforcing his rights against third parties.
The steps taken in such field are in the name of the insured. The cost will be borne by the insurer. Amounts recovered by the insurer become his property subject to the right of the insured to be fully indemnified.
9. Warranties :
The warranties clause is as follows:
Every warranty to which the property insured or any item thereof is or may be made subject shall from the time the warranty attaches apply and continue to be in force during the whole currency of this policy, and non-compliance with any such warranty.
Whether it increases the risk or not, shall be a bar, to any claim in respect of such property or item, provided that if this policy is renewed a claim in respect of loss or damage occurring during the renewal period shall not be barred by reason of warranty not having been complied with at any time before the commencement of such period.
The compliance of warranties is very essential Non-compliance with any of the warranty or even substantial compliance is fatal to the contract whether the risk thereby has increased or not. According to the clause the warranties of the previous policies or policy may not essentially be applied to renewed policies.
10. Arbitration :
The arbitration clause in the policy is mentioned as below:
In case either party shall refuse or fail to appoint an arbitrator within two calendar months after receipt of notice in writing requiring an appointment, the other party shall be at liberty to appoint a sole arbitrator, and in case of disagreement between the arbitrators.
The difference shall be referred to the decision of an umpire who shall have been appointed by them in writing before entering on the reference and who shall sit with the arbitrators and preside at their meetings.”
The above clause is meant to avoid undue litigation and settle the dispute by arbitration. It is a very simple, cheap and expeditious method of settling disputes.
11. Purchaser’s Interest Clause:
Sometimes a further memorandum in the following tens is also added to the policies:
If at the time of destruction or damage to any building hereby insured, shall have contracted to sell his interest in such building and the purchase shall not have been but shall be thereafter completed.
The purchaser on the completion of the purchase, if and so far as the property is not otherwise insured by or on behalf of the purchaser against such destruction or damages, shall be entitled to the benefit of this policy so far as it relates to such destruction or damage without prejudice to the rights and liabilities of the insured or the company under this policy up to the date of completion.
The above clause is useful to the vendor and purchaser up to the date of completion of the sale for their respective interests. If the purchaser elects to continue the insurance in his own name, in that case the purchase price will include the value of the unexpired insurance.
12. Loss Procedure :
It is the responsibility of the insured to inform about the loss as soon as the loss occurs. The insurer will send a claim form to the insured. In this form a detailed information about the loss, the place and the circumstances under which it occurred and the description of the property insured are given.
The insurer will examine the claim form and if find it reasonable, claim is paid at once. If the loss is serious and disputable the insurer may appoint an assessor called adjuster. The assessor or the adjuster will examine the cause of fire, the amount of loss and the amount of salvage. The details of the examination are sent to the insured and the insurer.
The completed claim form and the consent of the insured are also sent to the insurer. The insurer will see whether warranties are complied with or not. If the insurer is satisfied and the insurer is agreed, the amount of claim is paid. In case of dispute, the arbitrators and umpire may settle the dispute as has been described above.
In case the property was insured for more than one insurer, the leading office may pay the amount of the claim.
Ex Gratia Payment :
When the insurer pays certain portion of the claim before final settlement, it is called ex gratia payment. It is an act of grace. It is paid to avoid the hardship to the insured and also to keep the reputation of the insurer.
13. Contribution and Average :
The contribution and average clauses are as below:
If at the time of any loss or damage happening to any property hereby insured there be any other subsisting insurance or insurances, whether effected by the insured or by any other person or persons, covering the same property, this company shall not be liable to pay or contribute more than its rate able proportion of such loss or damage.
If the property hereby insured shall, at the breaking out of any fire, be collectively of greater value than the sum insured thereon, then the insured shall be considered as being his own insurer for the difference and shall bear rate able proportion of the loss accordingly. Every item, if more than one, of the Policy shall be separately subject to this condition.
The contribution clause clarifies that if there is more than one insurance, all the insurers will indemnify according to their proportion to the total insurance. So, the liabilities of the insurers are limited to their rate able proportions of the loss.
One alternative is also available that the insured can recover the whole of the loss from any one insurer leaving him to collect the proper contributions from the other insurers.
The contribution clause simplifies the claim settlement. The rate able proportion of each insurer is arrived at by dividing the sum insured under his policy by the total insured sum of all policies on the risk.
The following conditions must be fulfilled for this clause:
(i) The subject-matter of insurance must be common to all the policies.
(ii) The peril which is insured again must be common to all of them.
(iii) The same insured must be interested in all the policies.
(iv) All the policies must be in force at the time of the loss.
The average clause in fire insurance penalizes as under-insurance by a corresponding underpayment of loss. The clause reveals that the loss will be paid in proportion to the insured amount and total amount of property. For example
The pro rata condition of average is applicable to all policies issued by tariff offices in India.