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What is fire insurance and what does it cover?

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What is fire insurance and what does it cover?

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Fire insurance provides cover for the losses and unexpected financial expenses that you may face after a fire. Fires can be caused by a wide range of unforeseeable circumstances. A natural disaster may lead to a fire, or a man-made accident could trigger one. Whatever the cause may be, there’s no denying that when it’s not controlled right away, a fire could cause massive loss of life, property, and goods. This is why a fire insurance policy becomes necessary. 

What is a fire insurance policy?

Fire insurance is a contract where the insurer agrees to take on the financial risks associated with a possible fire, on your behalf. So, in case of any loss of property, goods or even life on account of a fire, your insurer will bear the financial losses that arise.

They will compensate you financially for these expenses and losses, up to the sum specified in the policy. And in return for transferring the risk to your insurer, you will have to pay a premium to them, as is the case with all kinds of insurance. This sums up the fundamentals of what fire insurance is.

What kinds of contingencies or perils does fire insurance cover?

You may know that fire insurance provides cover for losses arising from fires. But there’s more to this. A fire can be caused by various triggers, and not all of these perils are covered by fire insurance. 

Let’s take a closer look at the common contingencies or events that a standard fire insurance policy typically covers. 

  • General fire
  • Fires due to lightning strikes
  • Fires due to an explosion or an implosion
  • Fires on account of aircraft damages
  • Fires caused by riots, strikes and malicious damage (RSMD)
  • Fires that occur due to other natural calamities like storms, typhoons, floods, hurricanes, etc. 
  • Impact damages
  • Fires in case of landslides
  • Fires due to missile testing operations
  • Bush fires

The exact list of perils will, of course, vary slightly based on the policy you choose. But typically, these contingencies are covered by fire insurance. 

For which assets does fire insurance provide a cover?

A fire can damage almost every kind of assets and goods but not all these may be covered under a fire insurance policy. Although the list of inclusions will vary from one policy to another, here is a broad overview of the losses that are typically covered. 

  • Goods or property damaged by the actual fire
  • Goods or property damaged by the water used to extinguish the fire
  • Any adjacent property that has to be pulled down by the fire brigade in order to keep the fire from spreading
  • Goods broken or damaged while being removed from the property on fire

This should give you a good idea of what’s covered under a regular fire insurance policy. However, before you buy a fire insurance plan, you need to check the exact scope of coverage, so you are not in for a shock later. 

What is not included in a fire insurance plan?

Just like it’s important to know the inclusions, it’s also essential to know what is excluded from a fire insurance policy. Again, this will change from one fire insurance plan to another, but broadly speaking, here is a list of the common exclusions. 

  • Losses caused by invasion, hostilities or war, civil strife, and a military uprising or rebellion 
  • Losses caused by subterranean or underground fires
  • Losses caused by burning of property due to an order of a public authority
  • Losses on account of theft during or after the fire
  • Losses and damages to property due to spontaneous combustion 

What are the different types of fire insurance plans? 

If you’ve decided to get a fire insurance policy, you need to also be aware of the types of plans you can choose from. Here is a preview of the types of fire insurance plans currently available in the insurance market.

1. Valued policy

A valued policy is typically issued for goods and items like artwork, antiques, machinery, etc. For these items, the exact value of the goods cannot be determined in case of a loss or damage. So, the insurer agrees to compensate you a specific sum of money in case of loss or damage to these goods. This fixed sum is not related to the actual value of the loss.

2. Average policy

This kind of a fire insurance policy has a special ‘average clause.’ This clause is typically inserted to discourage people from keeping their property underinsured. Here, if the policy cover is less than the value of the property insured, the insurance provider will only pay out pro rata benefits in case of a loss. 

For instance, say your property is valued at Rs. 50,000, but you have purchased a policy with a cover of just Rs. 40,000. Now, in case of a fire-related loss of Rs. 15,000, if you raise a claim on a policy with the ‘average clause,’ your insurer will only pay you Rs. 12,000.

This is calculated as follows:

Claim payout is (Actual loss x Sum insured) ÷ Value of the asset

In the above example the payout is (Rs. 15,000 x Rs. 40,000) ÷ Rs. 50,000 = Rs. 12,000

3. Specific policy

As the name indicates, this kind of a fire insurance policy covers risk up to a specified, predetermined sum of money. In case of any fire-related loss, the insurer will cover the risk up to the specified sum. Here, since there is no ‘average clause,’ you will not be penalised for being underinsured. 

So, say you have purchased a specific policy with a cover of Rs. 80,000. In this case, here’s how claims will be paid out —

  • In case of a loss up to Rs. 80,000, say around Rs. 50,000, your insurer will compensate the entire amount of loss. 
  • In case of a loss over Rs. 80,000, say Rs. 1 lakh, the insurer will only pay the sum specified in the policy (i.e. Rs. 80,000).

4. Floating policy

When you think of the goods covered by a fire insurance plan, you may typically think of them as being located in the same place. However, for people in the business of trade, imports and exports, they may have inventory located at various places. A floating fire insurance policy can insure them all. 

5. Comprehensive policy

A comprehensive policy, as the name indicates, offers wide-ranging coverage for a variety of contingencies like fire, theft, burglary, third party risks, explosion, lightning damages and more. 

Should you buy a fire insurance policy?

If you’re on the fence about whether or not a fire insurance policy is needed, you’re not alone. This is a common dilemma, but here’s a quick overview of the categories of people who can typically benefit from a fire insurance plan.

  • If you are a homeowner
  • If you have lots of valuable goods at home
  • If you live in an area that is prone to bushfires
  • If you live near industrial or manufacturing units
  • If your business involves properties like hotels, lodges, or clinics
  • If you trade in goods and inventory

Summing up 

A fire insurance plan can be very beneficial, even if you do not fall under the above-mentioned categories. So, if you have the budget for it, it is always a good idea to be adequately insured. But before you purchase a fire insurance policy, make sure you thoroughly understand what’s covered and what’s not. 

Frequently Asked Questions (FAQs)

1. Which assets does fire insurance provide cover for?

Fire insurance coverage typically includes goods or property damaged by the actual fire and by the water used to extinguish the fire. Additionally, these plans may also cover the cost of repairing or restoring any adjacent property that has to be pulled down by the fire brigade to keep the fire from spreading. Also, any goods broken or damaged while being removed from the property on fire will be covered.

2. What is covered in a fire insurance policy?

A fire insurance plan typically covers fires due to perils like lightning strikes, an explosion or an implosion, riots, strikes and malicious damage (RSMD), or other natural calamities like storms, typhoons, floods, hurricanes, etc. 

3. What is the benefit of fire insurance?

Fire insurance essentially protects you from the financial implications of a fire. Your property, goods and belongings may be lost or damaged in a fire, and the cost of repairing or replacing them can be steep and of course, unplanned. With a fire insurance plan in your kitty, however, you need not worry about these financial outlays, because your insurer will take on the risk and compensate you adequately.

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