Standard Fire & Special Perils Policy in India - How Simple & Standard it is !!!!!

 building on fire

There are some things which appear elementary and are much complicated actually. Property Insurance is the nucleus of insurance and provides protection against natural hazards and accidents. The mother of all insurance and the most common of them all can be said to be Fire Insurance i.e, insurance against losses due to fire.

In India, the fire policy coverage is under Standard Fire Policy. Contrary to common belief, a Fire insurance policy offers indemnity not only against fire but against certain other specified perils as well. The term Fire for the purpose of a policy has a wider meaning that that ordinarily associated with the word fire. Fire is the rapid oxidation of a material in the chemical process of combustion, releasing heat, light and various reaction. The flame is the visible portion of fire. Depending on the substances alight, the colour of flame and intensity of fire would vary. There are three basic elements – heat, fuel and an oxidizing agent required. Fire can be prevented or extinguished by removing one of them.

                                                                   inside of a building after fire.
For those new to Insurance, the Insurance contract i.e., Policy document is drafted by the Insurer and any discrepancy in interpretation is certain to be held against the party drawing the contract wording. The Indian market now predominantly follows the “All India Fire Tariff” effective 2001. The Tariff has been subjected to revisions and amendments from time to time. During 1980s, the Fire Tariff presented bewildering demonic proportions being of big volume and too difficult even for the Insurers. During those days, there were restrictions of ‘night work’, usage of petrol / flammable material, material in open and for each of these there were restrictions by way of warranties and additional premium.

The Tariff was largely simplified and released with a new look effective April 1987 when there were three variants Fire Policy A, B & C. The first two, broadly, covered residences and non manufacturing / storage risks. Based on the perils covered, B & C offered similar protection. Policy A covered 9 perils : Fire, Lightning, Explosion/Implosion, RSMD, Impact damage, Aircraft damage, STFI, Subsidence & Landslide and Earthquake Fire & Shock. B covered only first six perils. C covered first six but the latter 3 could be extended upon payment of additional premium. At that time, the word Fire was not defined though following the commonly accepted rules, Fire would mean actual ignition and not mere heating and would exclude material on fire.

The Standard Fire and Special Perils Policy (Material damage) which came into effect from April 2003, defines Fire as : other than destruction or damage caused to the property insured by (a) its own fermentation, natural heating or spontaneous combustion (b) its undergoing any heating or drying process (c) burning of property insured by order of any Public Authority. This is a named peril policy specifying 12 perils.

For an insurance which has been in vogue for centuries (and is international in nature as variant of this basic format is being used in many countries) – is it really simple for understanding of the common insuring public will continue to haunt ! Even in developing and mature market, big Industrial houses having their own Insurance section and aided by International brokers still continue to grope when it comes to interpreting some of the basic issues even. Quite often claims are fought on interpretations – the Claimant would believe that theirs is a valid claim for it was a genuine occurrence without understanding that the cause of loss should be attributed to a peril specified in the Policy. The peril group VI. Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and Inundation (termed STFI peril) has been a bone of contention.

                                                       the unusual flooding in otherwise dry place

The Policy provides for indemnity of destruction or damage to the property insured caused by storm, cyclone, typhoon, tempest, hurricane, tornado, flood or inundation excluding those resulting from earthquake, volcanic eruption or other convulsions of nature. As could be seen there are two set of perils : wind and water. Storm, cyclone, typhoon, tempest, hurricane, tornado are all variants of wind blowing at different speeds and at different regions. Flood and inundation are water perils.

Though it is not stated on the Policy, the obvious reference for determining whether the wind that caused destruction would fall within the ambit is reference to ‘beaufort scale’ which is an empirical measure for describing wind speed. Its full name is Beaufort Wind Force Scale; created by Sri Francis Beaufort, a British Admiral and Hydrographer in 1806. Thus strong or gale winds would not be within the ambit of the policy but only damages caused by winds of speed over 89 kmph or 55 mph.

Comparatively, some established companies in Gulf market use different wording. There the Fire Policy only covers property destroyed or damaged by “Fire or Lightning”. The other perils are specifically extended by endorsements on payment of additional premium.

                                                  godown inundated by water damaging cartons

Seemingly it has better clarity. For example, here is an extract of the additional coverage provided under Flood. “Flood for the purpose of this extention shall mean the overflowing or deviation from their normal channels or confines of either natural or artificial watercourses (other than water tanks apparatus or pipes within the building insured) bursting or overflowing of public water mains and any other flow or accumulation of water originating from outside the building insured or containing the property insured but excluding –

a) loss destruction or damage caused by frost subsidence or landslip whether due to flood caused by such perils or otherwise

b) water damage occasioned by or through the leaking or otherwise defective roof (s) or as a result of doors windows or roof light/ air ventilators being left open or in a defective condition

c) property in the open or in transit

d) the first ………. Of each and every loss otherwise payable under this extention (i.e., the policy excess for this extention)

Similarly there is extention for wind perils which would cover “ Storm or tempest’ but excludes

(i) destruction or damage by flood frost subsidence or landslip whether caused by or happening through storm or tempest or otherwise

(ii) loss or damage caused by water rain hail sand dust or snow whether driven by wind or not unless ……………………..

                                                            vehicles deluged in mumbai

The other problem faced regularly is the description of property covered as now a days the broad description tends to be Building, Plant & machinery, Stocks. Whether Building would encompass only the main building or would cover all the structures including compound wall becomes a contentious issue many a times.

                                                         mumbai in June 2005 another view

The Gulf market has more clarity on this also as the policy clearly describes under exceptions :- damage by storm, tempest, water, hail, frost or snow to property – in the open (other than buildings, walls, gates, fences, signs, structures, and plant designed to exist and operate in open) and (b) contained in open sided buildings (other than signs, structures and plant designed to exist and operate in open-sided buildings) unless so described and specifically insured as a separate item in the schedule.

Stumbled upon a Fire Policy designed to cover building in US. Designated as Dwelling Property Basic Form, some of the terms were intriguing and I was wonderstruck by the clarity and simplicity of some of the expressions. The coverage description states that the cover is for dwelling on the location described but does not cover land (including the land on which the dwelling is located). The other structures can also be covered provided they are specified but used in whole or in part for commercial, manufacturing or farming purposes are not covered.

Under Perils Insured against it reads ‘we insure for direct physical loss to the property covered caused by listed perils’ unless the loss is excluded in the general exclusions. The perils so listed are : Fire or lightning, Internal Explosion (defined clearly as to exclude electric arcing, breakage of water pipes or breakage or operation of pressure relief vessels), Windstorm or hail, Explosion, Riot or Civil commotion, Aircraft, Vehicles, Smoke, Volcanic Eruption.

Coverage excludes interalia Earth movement further classified as Earthquake, Landslide, subsidence, any other earth movement; Water damage classified as Flood, surface water, waves, tidal water, overflow of a body or water or spray from any of these, whether or not driven by wind, water or waterborne material which backs up through sewers or drains or which overflows or is discharged from a sump, sump pump or related equipment.

The Indian Standard Fire Policy has a condition that the Company may at its option, reinstate or replace the property damaged or destroyed or any part thereof, instead of paying the amount of loss or damage or join with any other company……………………………………… ; the dwelling Policy of US states under Loss settlement : covered property losses are settled at actual cash value at the time of loss but not more than the amount required to repair or replace the damaged property. As against flying TATs, the US version states that we will adjust all losses with the Insured and will pay the Insured unless some other person is named in the policy or legally entitled to receive the payment. Loss will be payable 60 days after the Insurers receive the proof of loss and reach an agreement with the insured; there is an entry of final judgment or there is a filing of an appraisal award.

The Policy also has “Nonrenewal” clause which would be entirely new to Indian market. It states that Insurers may elect not to renew the policy. They may do so by delivering to the Insured or mailing to them at the mailing address given, written notice atleast 30 days before the expiration date fo the policy. Proof of mailing will be sufficient proof of notice.

As the standard policy does not cover floods, there is Standard Flood Insurance Policy as provided for in the National Flood Insurance Act of 1968. The Standard Flood Insurance Policy (SFIP) specifies the terms and conditions of the agreement of insurance between either the Federal Emergency Management Agency (FEMA) as insurer (for policies issued by the NFIP Servicing Agent) or the WYO company as insurer (for policies issued by the WYO Program) and the named insurer. Named insurers in NFIP participating communities include homeowners, renters, business owners, builders of buildings that are in the course of construction, condominium associations, owners of residential condominium units, and mortgagees/trustee (applicable to building coverage only.)

There reportedly are 3 forms – Dwelling Form, the General Property Form, and the Residential Condominium Building Association Policy. Each is used to insure a different type of property. There exists Flood maps also known as Flood Insurance Rate Maps (FIRM), showing the high-risk areas where there is at least a one-percent-annual-chance of flooding. Any body irrespective of whether live in flood prone area or otherwise can buy National flood insurance except those in Coastal barrier resources systems or other protected areas. The insurance can be bought any time but has a 30 day waiting period after premium payment.

Hope you found this post comparing Flood insurance interesting. Do provide your feedback by leaving your comment here or e-mailing me @ samvijib17@gmail.com

Regards – S(rinivasan) Sampathkumar