Fire insurance is a device to compensate for the loss consequent upon destruction by fire. Thus the fire insurer shifts the burden of fire losses from their actual victims over to all the members of the society.
It is a cooperative device to share the loss. It relieves the insured from the horror of the fire losses he is exposed to. These principles of fire insurance policies apply based on the type of fire insurance policy. Principles of insurance should be properly followed by fire insurance to fulfill the objections.
Principles of Fire Insurance
Insurable Interest in Fire Insurance
Insurable interest is the general principle of insurance without which an insurer cannot lawfully be enforced for 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 the contract and continue throughout its currency and at the time of loss. The 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.
- There should be a physical object capable of being damaged or destroyed by fire.
- The object must be the subject matter of insurance.
- The insured must stand in such a 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.’ 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 an insurable interest in the subject matter concerned.
- The owner of the property or asset, whether fixed or current, has an insurable interest, whether he is the legal owner or the equitable owner. The owner may be a single or joint holder. The partial owner can take a policy for full value as trustee of all the property. A Life tenant entitled to the use of the property during his lifetime only has an insurable interest.
- An agent has an insurable interest in the property of his principal.
- A partner has an equitable interest in the firm’s property.
- A creditor has an insurable interest in a property on which he has a lien for the debt.
- An insurer has it in respect of risks underwritten by him for the purpose of reinsurance.
- 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.
- A bailee can insure any article or property bailed, He may be a gratuitous bailee or bailee for a reward.
- A trustee has an insurable interest in the property put on trusteeship.
The Principle of Good Faith in Fire Insurance
The contract of fire insurance is one in which the observance of the utmost good faith (uberrima files) by both parties are of vital significance.
The utmost good faith in fire insurance has two aspects first, the disclosure of material facts, and second, the preservation of the property insured. The insurer and the insured must furnish detailed information regarding the subject matter to be injured.
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 the insurer did not ask it; the material fact is one which influences the decisions of the insurance.
The decision may pertain to the acceptance or declination or determination of the premium.
In the case of fire insurance, the examples of material facts are the construction of buildings. If the assured has not observed good faith, the contract can be avoided by other parties. !t was immaterial to plead that the insured was unaware of the fact and could not disclose it.
In a given circumstance, it is expected that the insured knows 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 the 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 the 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 minimizing loss.
Since the insured is near the property, he must act to prevent fire, and if a fire occurs, he must do his utmost to extinguish it. In such cases, he must act as if he was not insured.
Exceptions to Principles of Good Faith
In the following circumstances, the insured is not required to disclose information.
- All those circumstances diminish the risk.
- All those facts which are known or reasonably presumed to be known to the insurer.
- The information is common knowledge.
- 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.
- Those facts which are superfluous to disclose by reason of a condition or warranty.
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 from the destruction of the thing destroyed. It will check the temptation to destroy the property insured, thereby securing 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 will be 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 the fire in the case of valued policies.
Interpretation of Indemnity
The insured is entitled to perfect indemnity subject to the sum assured is 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 honest insured persons.
Now;
The insurance is extended to cover not only the material loss of the 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 the building, plant, and stock is covered, but the consequential loss of profits on account of the cessation of sales, salaries, taxes, rent, rates, etc., are also indemnified.
Nowadays, tangible and intangible losses are insured, and consequential loss is also within the meaning of indemnity.
Consequences of Indemnity in Fire Insurance
The consequences of the doctrine of indemnity are as below:
- The insured may claim only the amount of the loss sustained.
- In the case of partial damage, the insured may claim compensation only for the amount of damage done.
- The insured must transfer to the insurer any rights which he may possess against a third party in respect of the loss.
- If the insured has affected more than one policy, he is precluded from obtaining more than one complete indemnity.
A measure of indemnity varies with the type of property.
For damaged buildings, the measure of indemnity is the cost of repairing or reinstating the buildings to their pre-loss condition.
Similarly, for machinery, the measure of indemnity is the market value that is arrived at after taking into account wear and tear and depreciation.
For stock in trade, the measure is the net cost to the insured. The indemnification may be in the form of cash, repair, replacement, and reinstatement.
Proximate Cause of Fire Insurance
The rule is that the immediate and not the remote cause is to be regarded as causa proxima non-remota spectature. Proximate cause is very important in fire insurance.
The principle of proximate cause has already been discussed in detail.
The insurer always takes the proximate cause while paying the claim.
If the property insured is burned, but the fire was preceded and brought into operation by an excepted peril, the legal position depends upon whether the excepted peril was proximate.
The remote cause is when an incendiary bomb damaged the property; the proximate cause is enemy action.
Proximate cause is the active, efficient cause that sets in motion a train of events that brings about a result without the intervention of any force started and working actively from a new and independent source. It is a dominant, effective, and proximate cause to the exclusion of all other causes which are too remote.
If the loss is attributed to the insured perils, the direct and unavoidable result that a direct causal relationship is established, the insurer is liable for the loss.
Doctrine of Subrogation
Subrogation means the right of one person to stand in the place of another and to avail himself of the latter’s rights and remedies. The principle of subrogation is just a corollary to the principle of indemnity.
The insured can realize only the actual value of the loss or damage to the property according to the principle of indemnity and it follows that if the damaged property has any value left or the assured can recover the lost property or has any right against the third party regarding that property.
These must pass on to the insurer.
If the assured is allowed to retain them, he shall have realized more than the actual loss which is contrary to the indemnity principle.
The assured can proceed against the third party if he so desires, and if the lie recovers damage, the insurer is relieved of liability.
If the insured has received the full amount of his loss, any sums obtained from the third party belong to the insurer up to the amount of their disbursement.
The right of subrogation is exercisable at common law after the insurer has paid the claim made against him.
Warranties in Fire Insurance
The contents of the proposal form are expressly incorporated in the policy, which forms a warranty.
Warranty is that by which the assured undertakes that some particular thing shall or shall not be done, or that some conditions shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts.
Warranties mentioned in the policy are called express warranties, and those not mentioned in the policy are called implied warranties.
Implied warranties
The first implied warranty is that the property structure is not inferior, e.g., a mud house should not be made of a wooden roof of thatched leaves, grass, hay or bamboo cloths, etc.
There is a second warranty that Fire Extinguishing Appliances should be fixed with the property.
Annual maintenance is essential.
There should not be the possibility of silent risks, i.e., new construction addition. The special articles and property exposed to fire must be provided to the safety senders against fire.
The subject matter of insurance must exist when the contract is affected and should be identified in the event of a loss.
The identification is based on the locality, municipal number, surrounding, and full description of the place; a breach of warranty enables the insurer to avoid the claim.
Warranties must be complied with literally, and the effect of a breach of warranty is to render void the relevant item of the policy, even if no increase in risk is involved.
Every warranty to which the property insured or any item thereof is, or maybe, the made subject shall from the time the warranty attaches, apply and continue to be in force during the whole currency of the policies, 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.
The condition states that every warranty is attached during the whole currency of the policy. If a warranty has not been complied with during this period, the insured will not entertain any claim regarding the property or item affected.
However, if the policy is renewed and there was a breach of a warranty before the renewal date and not after it and a loss occur after the renewal is affected, the claim can be made in such a case.
Non-compliance with a warranty prior to the current renewal period of a policy is not a bar to a claim.
The non-compliance with a warranty avoids a cover only during the period of insurance in which the breach occurred. These are the ways that the principles of insurance are used in fire insurance.
