Articles Junction: Types of Fire Insurance Polices - Meaning and Definition of Fire Insurance

Meaning of Fire Insurance

What is fire insurance is given in the diagram below.

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“A fire insurance is a contract under which the insurer in return for a consideration (premium) agrees to indemnify the insured for the financial loss which the latter may suffer due to destruction of or damage to property or goods, caused by fire, during a specified period.”

Fire insurance is the popular form of general insurance. It is perfectly based on 'Principle of Indemnity'. In fact, all the five principles viz. Principle of utmost good faith, insurable interest, indemnity, subrogation; mitigations of loss are applicable to fire insurance.

Definition of Fire Insurance

Definition of fire insurance is given in the diagram below.

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Fire insurance contract is a contract by which the insurer undertakes, in exchange of consideration (Premium), to compensate the insured against loss by fire during a particular period and up to an agreed value.

According to Indian Fire Insurance Act, 1938

“In addition to other insurances, fire insurance is that insurance contract which takes place against fire and such other risk, which are mentioned in the fire insurance contract.”

Types of Fire Insurance Polices

Different, Explain the types of fire insurance policies are given in the diagram below.

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Various, types of fire insurance policies are given below.

Valued policy
Average policy
Specific policy
Floating policy
Comprehensive policy
Excess policy
Re-instatement policy
Blanket policy

Features, importance of Fire Insurance are given below.

1. Valued policy

What is Valued Policy? Meaning of Valued Policy are given in the diagram below.

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In types of fire insurance policies, valued policy is an important policy. Under this scheme, the insurance company first values the property to be insured with the help of surveyors. This value is entered in the policy. The insurer undertakes to pay compensation up to that value, if the subject matter suffers loss by fire. Such type of policy is usually taken for the property which cannot be valued easily. In such a case, the insured has no responsibility to prove the value of actual loss.

2. Average policy

What is Average policy? Meaning of Average policy are given in the diagram below.

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In types of fire insurance policies, average policy is an important policy. Under this scheme, if the property is not insured for its full value, i.e. if it is under-insured, the compensation is also under-paid proportionately e.g. if the property of $50,000 is insured for $25,000 (under-insured) and if the actual loss is estimated at $20,000, the insurance company will pay Z $10,000. Because as the value of policy is half of the value of property, the insurance company pays compensation also at half the actual loss. This is an exception to the general rule of payment of actual loss. Under this type of policy, the insured party is penalized for under insurance. This average clause is automatically cancelled if property is insured at its full value.

3. Specific policy

What is Specific policy? Meaning of Specific policy are given in the diagram below.

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In types of fire insurance policies, average policy is an important policy. Under this scheme, the fire policy covers the risk for a definite or fixed value. In case of loss the insurance company pays compensation up to the amount of policy or the actual loss, whichever is less e.g. If property of $50,000 is insured for a specific value of $25,000. In case of loss of $5,000, compensation will be $5,000, for a loss of $10,000; the compensation will be $10,000, But for a loss of $28,000, it will be Z $25,000 only.

4. Floating policy

What is Floating policy? Meaning of Floating policy are given in the diagram below.

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In types of fire insurance policies, floating policy is an important policy. Under this scheme, the goods stored at different places and the goods in transit are covered under a single policy. The rate of premium is fixed on average value of goods. The average value of goods is calculated by dividing the total value of goods stored at different places by the number of places, or in other words; the premium is fixed at an average rate, i.e. average of the premiums that would have been paid-off each lot of goods at different places had they been insured. All the goods are covered in this policy.

5. Comprehensive policy

What is Comprehensive policy? Meaning of Comprehensive policy are given in the diagram below.

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In types of fire insurance policies, comprehensive policy is an important policy. Under this scheme, the insurance company covers all types of risk. The property may be damaged by any cause- the insurance company pays compensation.

6. Excess policy

What is Excess policy? Meaning of Excess policy are given in the diagram below.

In types of fire insurance policies, excess policy is an important policy. Under this scheme, the businessman takes out one policy for one minimum amount under which his stock does not fall, and another policy is taken for the amount by which his stock rises. E.g. if the stock of a businessman is always between $30,000 to $40,000, he may take one policy for the minimum, i.e. $30,000. Another policy will be taken for the rise, if any. This policy taken for the rise is known as excess policy.

7. Re-instatement policy

What is Re-instatement? Meaning of Re-instatement are given in the diagram below.

In types of fire insurance policies, re-instatement policy is an important policy. Under this scheme, the insurance company pays compensation, which is sufficient to re-instate in a former position as before the loss.

8. Blanket policy

What is Blanket policy? Meaning of Blanket policy are given in the diagram below.

In types of fire insurance policies, blanket policy is an important policy. Under this scheme, a single policy covers all the Fixed as well as Current Assets.