IC-57 Fire and Consequential

IC-57
FIRE AND CONSEQUENTIAL LOSS

INSURANCE
ACKNOWLEDGEMENT
This course is based on revised syllabus prepared with assistance of:
V. P. Sharma
Sameer Saxena
Govind Johri
We also acknowledge Get Through Guides, Pune for their contribution in

preparing the study material.
G – Block, Plot No. C-46,

Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.
FIRE AND CONSEQUENTIAL LOSS
INSURANCE
IC-57
Revised Edition: 2014
ALL RIGHTS RESERVED
This course is the copyright of the Insurance Institute of India, Mumbai. In no

circumstances may any part of the course be reproduced.
The course is purely meant for the purpose of study of the subject by students
appearing for the examinations of insurance institute of India and is based on
prevailing best industry practices. It is not intended to give interpretations or
solutions in case of disputes or matters involving legal arguments.
Published by: P. Venugopal, Secretary-General, Insurance Institute of India, G-

Block, Plot C-46, Bandra Kurla Complex, Bandra (E) Mumbai – 400 051 and
Printed at
PREFACE
This course is designed for the use of candidates for the Associate ship
Examination of the Insurance Institute of India.
Specifically, the course deals with coverage under basic fire policies and
extensions thereof. Fire hazards and loss prevention, Risk Inspection Report,
System of rating and underwriting, drafting of policies and endorsements, legal
and procedural aspects of claims processing and specialized policies for
Petrochemical risks and large Industrial risks.
The course also includes some inputs on overseas fire insurance practice.
The course also deals with Consequential loss (Fire) insurance in terms of basic
coverage, extensions of coverage. Variations of basic coverage e.g. output
policy, revenue policy, gross fees policy and finally claims processing.
Although the course covers the syllabus prescribed for the examination, it is
desirable that candidates should read additional material such as text books,
office manuals and operating instructions and insurance magazines and law
journals etc. This will enrich their knowledge of the subject.
The candidates are also recommended to collect and study specimen forms used
in offices (e.g. Proposal, Policy, Claim form and other forms relevant to the
subject). This will provide a practical basis for their studies.
The course should also prove useful to the general reader who desires to have
knowledge of the subject covered.
CONTENTS
Chapter no. Title Page no.
1 Basic Principles and The Fire Policy 1
2 Add On Covers and Special Policies 31
3 Fire Hazards and Fire Prevention 63
4 Erstwhile Tariff – Rules and Rating 91
5 Documents 113
6 Underwriting 135
7 Claims - Legal Aspects 169
8 Claims – Procedural Aspects 199
9 Consequential Loss Insurance - I 223
10 Consequential Loss Insurance – II 251

Specialised Policies and Overseas
11 281
Practice
CHAPTER 1
BASIC PRINCIPLES AND THE FIRE POLICY
Chapter Introduction
This chapter aims to explain the terms of a fire insurance contract and the
various principles which form the foundation of insurance. The principle of
insurable interest forms the basis for deciding who can take insurance and for
whom. You will see how the principle of indemnity ensures that insurance can
be used only to shield one from potential loss and not to profit from it.
You will also learn how the principle of subrogation ensures that the insurance
company does not suffer losses by paying claims for the mistakes of some
negligent third party. And finally, you will also appreciate why you should
disclose all relevant information at the time of taking an insurance policy, as
specified by the principle of utmost good faith.
You will also look at how erstwhile Fire Insurance Tariff and the different
clauses governing a fire insurance policy are applicable in practice.
Learning Outcomes
A. Basic Principles and the Fire Insurance policy

B. Implications of Fire Tariff
IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 1

CHAPTER 1 BASIC PRINCIPLES AND THE FIRE INSURANCE POLICY
A. Basic principles and the Fire Insurance Policy
1. Introduction
Fire insurance business has been defined in Section 2 of the Insurance Act,
1938 as:
Definition
The business of effecting, otherwise than incidentally to some other class of

insurance business, contract of insurance against loss by or incidental to fire or
other occurrence customarily included among the risks insured against in fire
insurance policies.
The subject matter of fire insurance may be any kind of moveable and
immovable property having pecuniary value, i.e., financial value of building,
furniture, fixtures and fittings, household contents, plant, equipment and
machinery, stocks and merchandise in premises or in the open etc.
The definition above refers to “fire or other occurrence customarily included

among the risks insured.” These risks are classified as
i. social perils, e.g. riot, strike, etc.,

ii. natural perils e.g. storm, flood, etc., and
iii. miscellaneous types of perils, e.g. aircraft damage, impact damage by
road / rail vehicle, etc.
Important
Material damage caused by fire or these allied perils is covered under fire
insurance. In addition to material damage, there may be consequential losses,
e.g., loss of production resulting in loss of profits, etc. These losses are covered
under a separate insurance Policy known as Consequential Loss (Fire) policy
which is dealt with in chapters 9 and 10.
Definition
Fire Insurance contract may be defined as an agreement between the insurers

and the insured whereby the insurers having received premium, undertake to
make good the financial loss, (subject to the sum insured) suffered by the
insured as a result of damage or destruction of the insured property by fire or
other specified perils, during a stated period.
2 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE

BASIC PRINCIPLES AND THE FIRE INSURANCE POLICY CHAPTER 1
Fire Insurance contracts are governed by the general law of contract as

embodied in the Indian Contract Act, 1872, and a fire insurance contract must
have the following essential ingredients in order to make it enforceable at law:
i. Offer and acceptance

ii. Consideration
iii. Agreement between the parties
iv. Legal competence of the parties to the contract and
v. Legality of the contract
2. Basic principles
Fire insurance is governed by basic principles evolved under common law. These
are discussed below:
Diagram 1: Basic principle

a) Utmost good faith
In insurance contracts, the legal doctrine of utmost good faith applies.

The insured has the duty to disclose all material facts, which have a bearing
on the insurance. A breach of this duty may render the contract void or
voidable depending upon the nature of the breach.
The duty of disclosure of material facts, under common law, ceases when
the contract is concluded. However, condition 3 of the fire policy provides
that the insured should give notice to insurer if there are any material
alterations during the currency of the policy. Hence the duty of disclosure
continues throughout the currency of the policy.
The fire proposal form includes a declaration by the insured that the
statements are true and that it shall form the basis of the insurance
contract. The duty of utmost good faith becomes a contractual duty and
statements in the proposal form are converted from mere representations
into warranties and have to be literally true.
Where the premises are surveyed by the insurers, they are deemed to have
acquired the material information concerning the risk and the insurer cannot
later penalise the insured for non-disclosure or misrepresentation unless he
is able to establish that the insured deliberately withheld any information
from or made any wrong statement to the surveyor.
According to this principle the insured is also expected to act as if he is

uninsured at all times and safeguard his property from the perils, and
following a loss the insured is expected to salvage as much of the property
as possible and ensure proper firefighting operations.
b) Insurable interest
The requirement of insurable interest gives legal validity to insurance

contracts and distinguishes them from mere wagers. Insurable interest
may be defined as the legal right to insure which arises out of a pecuniary
relationship between the insured and the subject matter of insurance
whereby destruction or damage to the latter involves the insured in financial
loss.
Absolute legal ownership affords a clear example of insurable interest. A

number of other persons may also have insurable interest.

Example
A bank or a financial institution which has advanced money on the security of

property possesses insurable interest in the property, to the extent of the
amount of loan and interest outstanding. In practice, insurance is granted in the
joint names of the owner and the bank subject to the Agreed Bank Clause
incorporated in the policy. (This clause is dealt with in chapter 2).
In fire insurance insurable interest should exist at the time of taking the
policy, continue throughout its currency and should exist at the time of a
loss. Fire insurance policies are personal contracts. Hence, if the property is
sold or transferred, the policy is not transferred automatically. Transferring
the policy in the new owner’s name has to be agreed to, accepted and
endorsed on the policy (see condition 3 of the fire policy).
c) Principle of indemnity
Fire insurances are contracts of indemnity – that is, their object is to

place the insured, as far as possible, in the same financial position after a
loss as that object was immediately before the loss.
Definition
The principle of indemnity means insured is indemnified only to the extent of

his loss; no profit or undue benefit is allowed
The indemnity is subject to the sum insured and other terms of the policy.
The sum insured can be fixed on reinstatement or market value, or agreed
value. Let us understand these terms below:
i. Market Value
Definition
The term “market value” or “actual cash value” means, for insurance purposes,
the present cost of construction of similar building, after deducting from the
cost, depreciation based on age, usage, maintenance etc.
Similarly, for plant and machinery, market value is arrived at by deducting

suitable depreciation for age, usage, wear and tear, etc., from the current
replacement costs. In all these cases, depreciation refers to actual intrinsic
physical depreciation and not the depreciation rates used for accounting
purposes or for the purpose of income tax to arrive at the book value or
written down value in the books of account.

ii. Book Value
Definition
Book value is the value of the property as indicated in the insured’s books of
accounts. It is arrived at by applying depreciation on the original cost of the
property.
At some point of time this value may be nominal and not adequate for
insurance purposes. Book value is never the right method of determining
sum insured for insurance purpose. Book value will always vary due to
appreciation or depreciation in cost or reinstatement of similar property on
the date of claim later.
iii. Reinstatement Value (RIV)
Definition
Reinstatement value is the value at which the damaged property can be

reinstated or replaced by new property of the same kind, without deducting
depreciation.
Reinstatement value is different from reinstatement condition (condition

no. 9) of the policy. Reinstatement value is a choice offered to the insured
for obtaining better indemnity. As per condition no 9 of the policy, choice of
reinstatement of property vests with insurer post loss payment.
(reinstatement value policy is explained in chapter 2 )
iv. Agreed value
Agreed value, is dependent on the type of property and the intention of

parties to the contract subject to Valuation Certificate acceptable to the
insurers. This method is resorted to in the case of obsolete machinery or
heritage buildings where depreciation is not a material factor and
availability of similar type of property is not possible.

Following are the bases on which sum insured can be fixed:
Property Sum insured

Buildings
Plant, Machinery and Accessories Market Value
Or
Fixture, Furniture & Fittings Reinstatement Value
Electrical Installation
Other contents like household effects and contents in Market value
shops, etc.
Properties whose market value cannot be ascertained
e.g. works of Art, manuscripts, obsolete machinery, Agreed value
heritage buildings etc.
Stocks
Raw material Market Value, i.e. the cost at which the insured can
purchase it in the market to replace the damaged raw
material.
Semi-finished goods Market Value, i.e. the cost of raw materials including
the expenses incurred up to the stage it has been
processed.
Finished goods Market Value, i.e. the cost of raw materials plus all the
overhead expenses incurred till it reaches the finished
goods stage. Selling price which includes the profit
cannot be the sum insured.
Important
To sum up, the following points should be noted:
i. The sum insured is always to be fixed by the insured.
ii. The sum insured is the maximum limit of liability under the policy.
iii. The sum insured is the amount on which the rate is applied to arrive at the
premium.
iv. The sum insured should represent the actual value of the property insured.
If there is over-insurance, there is no benefit to the insured; if there is
under-insurance, the claim amount will be proportionately reduced by
applying pro-rata average. (This is explained later in this chapter).

CHAPTER 1 FIRE TARIFF
d) Subrogation
The principle of subrogation is a corollary of the principle of indemnity. If

the loss suffered by the insured is recoverable from third parties who are
responsible for the loss, the insured’s rights of recovery are transferred or
subrogated to the insurers when they indemnify the loss.
e) Contribution
The principle of contribution which is also a corollary of the principle of

indemnity provides that if the same property is insured under more than one
policy, insured cannot recover more than the loss suffered; he can recover
only a rate-able proportion of the loss under each policy. (Both these
principles are reiterated in the policy conditions to give additional
emphasis.)
Test Yourself 1
The principle of subrogation and principle of contribution are corrolories to

which principle of insurance?
I Principle of proximate cause

II Principle of utmost good faith
III Principle of insurable interest
IV Principle of indemnity
B. Fire Tariff
1. Introduction
Fire insurance business was governed by the All India Fire Tariff (AIFT). The
Tariff Advisory Committee have laid down rules, regulations, rates, advantages,
terms and conditions for fire insurance business in India under the provisions of
Part IIB of the Insurance Act, 1938 (as amended). The Tariff is statutorily
binding on all insurers and any breach of the Tariff shall be a breach of the Act,
(vide provisions of Sections 64 UC (4) and (5) of the Insurance Act, 1938 as
amended).
The IRDA, after extensive discussions through its Advisory Councils withdrew the
rating part of the tariffs effective from 1st January, 2007. It was also decided
that tariff regulations other than those relating to rating viz. clauses,
warranties, policy wordings etc., shall be followed until decided otherwise.

FIRE TARIFF CHAPTER 1
The tariff was structured into eight sections with an Annexure consisting of
specimen clauses.
Section I General rules and regulations

Section II Standard fire and special perils policy
Section III Dwellings, offices, hotels, shops etc.
Section IV Industrial / manufacturing risks
Section V Utilities located outside the industrial / manufacturing risks
(stand alones)
Section VI Storage risks outside the compound of industrial /
manufacturing risks
Section VII Tank farms / gas holders outside the compound of industrial /
manufacturing risks
Section VIII Add-on covers
Annexure Specimen copy of clauses
Important
i. The rates and percentages provided in the Study Text are for illustrative
purposes only.
ii. These rates are not to be used for official purposes. These rates and
percentages are subject to change from time to time.
iii. The readers are not expected to memorise these rates and percentages.
2. Standard Fire and Special Perils Policy
The policy form consists of
a) Operative clause,
b) General exclusions and
c) General conditions
Note: The standard fire and special perils policy is hereinafter referred to as
the ‘fire policy’.
a) Operative Clause
This clause consists of three parts: preamble, limitation of the sum

insured and perils covered

Preamble
The first part recites the parties to the contract and provides that if after
payment of premium, the property insured described in the schedule, be
directly destroyed or damaged by any of the perils specified during the
period of insurance or during renewal of the policy for which premium is
received, the company shall pay to the insured subject to the terms of the
policy the value of the property at the time of its destruction or the
amounts of such damage or at its option reinstate or replace such property.
Limitations of the sum insured
The last part of the clause provides that liability of the company shall in no
case exceed in respect of each item the sum insured thereon or in the whole
the total sum insured specified in the schedule.
Perils covered
The perils covered are now dealt with as hereunder:
i. Fire
Definition
The term ‘fire’, for insurance purposes, means actual ignition or burning, under
accidental or fortuitous circumstances, so far as the insured is concerned.
Excluding destruction or damage caused to the property insured, by:
 its own fermentation, natural heating or spontaneous combustion

 its undergoing any heating or drying process
 burning of property insured by order of any Public Authority
Exclusions
Loss by fermentation, natural heating or spontaneous combustion,

heating or drying process is not an accidental loss but rather an inevitable
loss under certain circumstances.
Example
Spontaneous combustion results from internal heating which takes place in

certain substances (e.g., hay, coal) when stocked or stored in bulk.

However, to understand the effect of the exclusion, the words ‘its own’ are
important. The effect of these words is to exclude liability in respect of that
property actually affected by spontaneous combustion, etc., or by heating
or drying process, and not in respect of other property damaged by fire, so
originated.
Example
If a haystack is ignited through spontaneous combustion and the fire spreads to

other haystacks, the exclusion would apply to the first haystack only, the
subsequent losses being payable.
To give another example, if sugar undergoing refining process through the

application of heat, is damaged by excessive heating, the loss is not payable.
(Note: Spontaneous combustion peril can be insured on payment of extra

premium. See chapter 2)
Once there is a ‘fire’ within the meaning of the Fire policy, the following
losses are also payable:
Direct consequences of damage during or immediately following a fire

caused by
 Smoke;
 Scorching
 Falling walls.
Damage caused by fire brigade persons to minimise losses in the

discharge of their duties e.g.
 damage caused by water

 damage caused by blowing up the property to prevent spreading of
fire
Damage to property removed from a burning building caused by exposure

to weather, provided the removal was made in an endeavor to mitigate
the loss.
ii. Lightning
All damages caused by lightning, whether fire results or not, are covered.

iii. Explosion / Implosion
Excluding destruction or damage caused to the boilers (other than domestic

boilers), economisers, or other vessels in which steam is generated,
machinery or apparatus subject to centrifugal force by its own explosion /
implosion.
Definition
An explosion is “a sudden violent burst with a loud sound”.
Explosion causes damage by rupturing, shattering, cracking etc. of property.

Explosion damage is evidenced by broken machinery, shattered glass,
splintered timbers and widely scattered debris. This is known as ‘concussion
damage’.
Definition
Implosion means bursting inward or collapse due to external pressure.
The exclusion refers to destruction or damage to boilers (other than

domestic boilers), economisers, etc. This risk can be covered under an
engineering policy for boilers and pressure vessels.
iv. Aircraft damage
Destruction or damage caused by aircraft, other aerial or space devices and

articles dropped there from, excluding that caused by pressure waves.
The term ‘aerial or space devices’ would include, balloons, rockets,

artificial satellites etc.
The exclusion of pressure waves relates to damage, for example, rattling of

window panes caused by aircraft flying low or supersonic boom creating thud
due to shock waves causing fissures in multi-storey buildings by an aircraft
flying at supersonic speed.
v. Riot, strike, malicious and terrorism damage
Direct visible physical loss, destruction or damage by external violent means

caused to the property but excluding those caused by:
 Total or partial cessation of work or the retarding or interruption or

cessation of any process or operations or omissions of any kind.

 Permanent or temporary dispossession resulting from confiscation,

commandeering requisition or destruction by order of the government or
any lawfully constituted authority.
 Permanent or temporary dispossession of any building or plant or unit or

machinery resulting from the unlawful occupation by any person of such
building or plant or unit or machinery or prevention of access to the
same.
 Burglary, house breaking, theft, larceny or any attempt by any person in

any malicious act.
Terrorism damage exclusion warrantee
The policy excludes loss, damage, cost or expense of whatsoever nature

directly or indirectly caused by, resulting from or in connection with any act
of terrorism regardless of any other cause or event contributing concurrently
or in any other sequence to the loss.
Definition
An Act of Terrorism means (for the purpose of this exclusion,) an act or series
of acts, including but not limited to the use of force, or violence and/or the
threat thereof, of any person or group(s) of persons, whether acting alone or on
behalf of or in connection with any organisation(s) or governments or unlawful
associations, recognised under unlawful activities ( prevention) Amendment Act
2008 or any other related and applicable national or state legislation formulated
to combat unlawful and terrorist activities in the nation for the time being in
force, committed for political, religious, ideological or similar purposes
including the intention to influence any government and / or to put the public
or any section of the public in fear for such purposes.
This exclusion also includes loss, damage, cost or expense of whatsoever

nature directly or indirectly caused by, resulting from or in connection with
any action taken in controlling, preventing, suppressing, or in any way
related to the above.
Terrorism Damage Inclusion Clause
Insuring Clause: Subject otherwise to the terms, exclusions, provisions and

conditions contained in the policy and in consideration of the payment by
the insured to the Company of additional premium as stated in the schedule,
it is hereby agreed and declared that notwithstanding anything stated in the
“Terrorism Risk Exclusion” of this policy to the contrary, this policy is
extended to cover physical loss or damage occurring during the period of
this policy caused by an act of terrorism, subject to the exclusions, limits
and excess described hereinafter.

For the purpose of this exclusion, an act of terrorism is defined as follows:
Definition
An Act of Terrorism means an act or series of acts, including but not limited to
the use of force, or violence and/or the threat thereof, of any person or
group(s) of persons, whether acting alone or on behalf of or in connection with
any organisation(s) or governments or unlawful associations, recognised under
unlawful activities (prevention) Amendment Act 2008 or any other related and
applicable national or state legislation formulated to combat unlawful and
terrorist activities in the nation for the time being in force, committed for
political, religious, ideological or similar purposes including the intention to
influence any government and / or to put the public or any section of the public
in fear for such purposes.
This cover also includes loss, damage, cost or expense of whatsoever nature
directly or indirectly caused by, resulting from or in connection with any
action taken in controlling, preventing, suppressing or minimising the
consequences of an act of terrorism by the duly empowered Government or
Military Authority.
Provided that if the insured is eligible for indemnity under any government
compensation plan or other similar scheme in respect of the damage
described above, this policy shall being excess of any recovery due from any
such plan or scheme.
For the purpose of aforesaid inclusion clause, military authority means:
Definition
“Military Authority” means armed forces, paramilitary forces, police or any

other authority constituted by the Government for maintaining law and order.
vi. Storm, cyclone, typhoon, tempest, hurricane, tornado, flood and

inundation
The loss or destruction or damage caused by STFI is covered as per their

popularly accepted meanings excluding these resulting from earthquake,
volcanic eruptions, and other convulsions of nature”. Whenever earthquake
risk is covered as an add on cover, the words “excluding these resulting from
earthquake” should be deleted.

Definition
Storm is defined as “some severe, if not violent, atmospheric disturbance such

as unusually heavy rain, hail, wind, snow storms, or some combination of these.
Cyclone, typhoon, etc. are examples of storms of greater intensity.
Definition
Flood is usually defined as “escape from its normal confines, of a body of

water, due to a rise in its level, or to the breakdown of the barriers restraining
it.”
vii. Impact Damage
Impact by direct contact by any rail / road vehicle or animal by direct

contact not belonging to or owned by:
 the insured or any occupier of the premises or

 their employees while acting in the course of their employment
Impact damage due to insured’s own Rail / Road vehicles and the like and
articles dropped there from can be included as an “add on cover” by
endorsement and at extra premium (see chapter 2).
viii.Subsidence and landslide including rockslide
Destruction or damage caused by subsidence of part of the site on which the

property stands or landslide / rockslide excluding:
 the normal cracking, settlement or bedding down of new structures

 the settlement or movement of made-up ground
 coastal or river erosion
 defective design or workmanship or use of defective materials
 demolition, construction, structural alterations or repair of any property
or ground works or excavations
ix. Bursting and / or overflowing or water tanks, apparatus and pipes
x. Missile testing operations
These operations are conducted by the Government of India.

xi. Leakage from automatic sprinkler installation
Excluding destruction or damage caused by:
 Repairs or alterations to the buildings or premises.

 Repairs, removal or extension of the Sprinkler Installation.
 Defects in construction known to the insured.
A sprinkler installation is designed to automatically discharge water when a

fire takes place. Damage caused by water is thereby payable as damage by
fire. However, there may be accidental leakage from the installation, when
there is no fire. This risk covers the damage caused thereby.
xii. Bush Fire
Excluding destruction or damage caused by forest fire.
Bush fire is limited and localised compared to spread of forest fire and
refers to, for example accidental burning of vegetation, grass etc., in and
around the insured premises. Forest fire is catastrophic in nature and can be
included as an “add-on” cover on payment of extra premium (See Chapter
2).
b) General Exclusions
There are thirteen exclusions under the policy:
i. 5% of each and every claim resulting from the operation of Lightning /

STFI / Subsidence & Landslide including Rockslide. (Minimum Rs.10,000/)
and for loss due to other perils covered under the policy having Sum
insured up to INR 10 cr per location (for business incepting from 1st April
2011). The excess is applicable per event per insured. This is called a
‘compulsory excess’ or compulsory ‘deductible franchise’.
ii. Loss or damage caused by war, civil war and kindred perils.
iii. Loss or damage directly or indirectly caused to the property insured by

nuclear risks.
iv. Loss or damage caused to the insured property by pollution or

contamination excluding:
 pollution or contamination which itself results from a peril hereby

insured against
 any peril hereby insured against which itself results from pollution or
contamination

The exceptions (a) and (b) provide cover in respect of pollution or

contamination.
Example
For example fire (an insured peril) may cause pollution damage to insured
property or fire itself may result from pollution, for example through
leakage of gas.
v. Loss or damage (unless otherwise expressly stated in the policy) to
 bullion or unset precious stones
 curios or works of art for an amount exceeding Rs.10,000/-
 manuscripts, plans, drawings, securities, obligations or documents

of any kind
 stamps, coins or paper money, cheques,
 books of accounts, or other business books,
 computer systems records,
 explosives
(Note: These properties may, however, be covered subject to special terms

and conditions when expressly declared for coverage.)
vi. Loss or damage to the stocks in cold storage premises caused by change
of temperature.
However, deterioration of stocks in cold storage premises due to failure of

electric supply and /or fire damage to Cold Storage Machinery following
damage due to an insured Fire Policy peril may be covered by endorsement.
(This is dealt with later under “Add-on” covers – Chapter 2)
vii. Loss or damage to
 Any electrical machine, apparatus, fixture or fitting (excluding fans

and electrical wiring in dwellings) arising from
 Over-running, excessive pressure, short circuiting, arcing, self-

heating or leakage of electricity, from whatever cause (lightning
included).

This is known as “Electrical Risks” exclusion clause. These risks can be

covered separately under Machinery Insurance Policy (Engineering
insurance).
It is to be noted that, damage to the electrical machine, etc. by specified

electrical risks is only excluded, however, if the resulting fire is covered if it
causes damage to other insured property due to spread of fire. .
viii. Expenses necessarily incurred on (i) Architects, Surveyors and Consulting

Engineers fees and (ii) Debris Removal by the insured following a loss,
destruction or damage to the property insured by an insured peril in
excess of 3% and 1% of the claim amount respectively.
It is to be noted that a specified percentage of the claim amount is in-built

in the policy. The following clauses are attached to the policy.
Architects, Surveyors and Consulting Engineers Fees
It is hereby declared and understood that the expenses incurred towards

architects, surveyors and consulting engineers fees for plans, specification
tenders, quantities and services in connection with the superintendence of
the reinstatement of the Building, Machinery, Accessories and equipment
insured under this policy up to 3% of the adjusted loss, but it is understood
that this does not include any cost in connection with the preparation of the
insured’s claim or preparation of estimate of loss in the event of damage by
insured perils.
Debris Removal
“It is hereby declared and agreed that the expenses incurred up to 1% of the
claim amount is covered on
 Removal of debris from the premises of the insured

 Dismantling or demolishing
 Shoring or propping
Note: Second and third point above are to be deleted when neither building
nor machinery are covered".
(Note: Fees and expenses in excess of 3% and 1% but up to a stipulated limit

can be covered by extension of the policy. (This is dealt with under “Add-
on” covers in the chapter 2)

ix. Loss of earnings, loss by delay, loss of market or other consequential or

indirect loss or damage of any kind or description whatsoever. The fire
policy covers only “material damage” to insured property caused by
insured perils. This position is abundantly made clear by the exclusion.
However, some of the consequential losses resulting from ‘material
damage’
Example
Loss of gross profit; standing charges and increased cost of working to return to
normalcy within a stipulated indemnity period can be covered under a separate
Consequential Loss (Fire) Policy.
x. Loss or damage by spoilage resulting from the retardation or interruption

or cessation of any process or operation caused by operation of any
insured peril. (This is dealt with later under “Add-on” covers in the
chapter 2.)
xi. Loss by theft during or after the occurrence of any insured peril except
as provided under riot, strike, malicious damage and terrorism damage
cover
xii. Loss or damage due to earthquake, volcanic eruption or other

convulsions of nature.
xiii. Loss or damage to property if removed to any building or place other

that in which it is insured, except machinery and equipment temporarily
removed for repairs, cleaning, renovation or other similar purpose for a
period not exceeding 60 days.
c) Conditions
There are fifteen conditions in the policy and the salient features of these
conditions are outlined below.
i. This condition provides that the policy shall be voidable in the event of
mis-representation, mis-description or non-disclosure of any material
particulars. This is reiteration of the principle of utmost good faith, for
the sake of emphasis.
ii. All insurances under the policy cease after seven days from the date of
fall of displacement of any building or part thereof.
This does not apply if such fall or displacement is caused by the insured
perils loss or damage which is covered by the policy.

However, if notice is given not later than seven days of such fall, the
company may agree to continue, the insurance subject to revised terms and
conditions and by endorsement of the policy.
iii. This is known as the material alteration condition. Under any of the
following circumstances the insurance ceases to attach as regards the
property affected:
 Changes in trade or manufacture or nature of occupation or other

circumstances which increase the risk of loss or damage by insured
perils.
 Un-occupancy of the building for a period more than 30 days.
 Transfer of insurable interest unless by will or operation of law.
When the insured’s insurable interest ceases (e.g., sale of property), the
insurance automatically ceases. However, two exceptions are made:
 On the death of the insured, the policy vests in the legal heirs named
in the will. A trustee or liquidator in bankruptcy proceedings acquires
insurable interest and becomes the insured.
 The insurance may be continued if the insured before the occurrence

of any loss or damage, obtains sanction of the company through
endorsement.
iv. The insurance does not cover any loss or damage to property which,
at the time of loss or damage, is insured by any marine policy. But the
policy will cover only the excess beyond the amount payable under the
marine policy. This is known as Marine clause.
Marine cargo policies include cover in respect of fire and it is possible for
fire and marine policies to overlap, for example, for the period during
storage of goods in port premises.
v. The insurance may be terminated at any time by the insured and

premium is refunded at short period scale or by the company, on 15
days’ notice and premium for the unexpired term is refunded on pro-rata
basis.
vi. This condition is in two parts and is known as duty to insured clause..
First part
The first part of the condition lays down the duties of the insured in the
event of loss or damage and the procedure to be followed by him. The
requirements are:

Immediate notification of the loss to the company
Submission within 15 days of the loss or, within such extension as may be
granted by the company of a written statement of the claim giving full
particulars of the loss or damage and of the property affected and
details of other insurances, if any. (Usually, the insurers supply a claim
form for the purpose.)
Submission of all reasonable information and proof in respect of the

claim at the insured’s expense
A declaration, on oath or in other legal form of the truth of the claim.

(This is rarely insisted upon in practice.)
The condition expressly provides that compliance with its terms is

precedent to insurer’s liability. Although an independent loss assessor is
appointed by the insurers to report on the cause and extent of loss, the
provisions of this condition are still binding on the insured.
Second part
The second part of the condition is known as ‘limitation condition’.

According to this condition the liability of the insurer for any loss is
extinguished after the expiry of twelve months from the date of the loss,
unless the claim is the subject of pending action or arbitration.
Further, if liability for any claim is disclaimed by the insurer, and the
insured has not filed a suit in a court of law, within 12 calendar months
from the date of the disclaimer, then the claim is deemed to be
abandoned and cannot be recovered thereafter. In other words, the
claim becomes time barred.
This condition provides necessary protection to the insurer against

inordinate delay on the part of the insured in substantiating the claims.
It is not possible for the insurer to keep its accounts open for an
indefinite period. In the absence of this condition, it would be possible
for the insured to reopen his claim after a considerable lapse of time
when the insurer may have lost all traces of the evidence which led to
its original rejection.
vii. The condition gives right to the insurance company to enter the
premises where loss has occurred, take possession of property and deal
with it as may be necessary (e.g. salvaging) and sell such property for
account of all concerned. This is known as the ‘right of entry’
condition.

The condition further provides that:
 Exercise of these rights does not mean that liability for loss is admitted.
 Benefit under the policy is forfeited if the insured does not Co-operate.
 The insured has no right to abandon the property to the insurers whether
taken possession of or not by them.
The right of abandonment arises under a Marine Policy where the insured
can abandon to the Insurers, property which is extensively damaged and
claim a constructive total loss. This right is however denied under a fire
policy (as otherwise it would cause a lot of problems for the insurers).
This condition confers certain rights on the insurers in the event of a

claim. These rights are necessary for the insurers to ascertain the cause
and extent of loss or damage, to minimise the damage, and to protect
the salvage. The condition enables the loss assessors to enter the
premises to establish the cause and extent of loss and the salvage corps
to protect the salvage and minimise the damage that may be caused in
the process of extinguishment.
The rights conferred by the condition are exercisable by the company at any
time until:
 Notice in writing is given by the insured that he makes no claim or
 Such claim is finally determined or withdrawn.
viii. This condition deals with fraud. According to this condition, all
benefits under the policy shall be forfeited in the following
circumstances :
 The claim is fraudulent.
 The claim is supported by a false declaration.
 Fraudulent means are used by the insured or any one acting on his
behalf.
 Loss or damage is caused by the willful act of the insured or with his
connivance.

These provisions merely reiterate the position under common law. Utmost
good faith is an implied condition in an insurance contract and places upon
the insured the duty to deal honestly with the insurer when a claim arises.
Fraud will automatically avoid the policy, so also willful fire caused by the
insured or with his connivance. However, for the sake of special emphasis,
an express condition is incorporated in the policy.
This is the ‘reinstatement or indemnity condition’. The operative clause

provides that the company may pay the value of the property at the time of
its destruction or the amount of damage or at its option reinstate or replace
such property. This condition makes provisions relating to reinstatement or
replacement to its pre fire condition in exercise of this option as follows:
 Reinstatement shall not be exact or complete but shall be in a

reasonably sufficient manner.
 Expenditure is limited to the cost of reinstating the property to its

pre-fire condition subject to the sum insured chosen.
 It is the duty of the insured to furnish, at his expense, the insurer

with all plans and such other particulars as may be required.
 Any act done by the insurer with a view to reinstate is without

prejudice to the final decision regarding reinstatement and in the
manner prescribed above.
 If due to municipal or other regulations in respect of building

construction etc. the insurer is unable to reinstate, the liability is
limited to such sum as would be sufficient to reinstate such property
if the same could lawfully be reinstated to its former condition i.e.,
on indemnity basis.
The condition is rarely invoked in practice.
(The main object of inserting this condition is to have some protection

against unreasonable or exaggerated claims. If the insured is not inclined to
accept the offer of reinstatement, it may prove to be a factor in favour of
the insurer in any subsequent litigation.)
ix. This is the pro-rata average condition.
If the property hereby insured shall, at the eruption of fire, or, at the
commencement of damage by any other peril insured 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 a
rateable proportion of the loss accordingly. Every item, if more than one, of
the policy shall be separately subject to this condition.

According to this condition if there is under insurance, that is, if the sum
insured under the policy is less than the value of the property on the date of
loss the amount of loss payable will be proportionately reduced. The object
of the condition is to penalise under insurance by a corresponding under
payment of claim.
Example
The application of the condition may be illustrated with an example.
Sum insured Rs.30,000/-

Value of property Rs.40,000/-
Loss Rs.16,000/-
Amount of claim payable (Rs.16,000 x Rs.30,000 / Rs.40,000) Rs.12,000
The second part of the condition provides that if the fire policy covers more
than one item of property each item of property will be separately subject to
average. This may be illustrated as follows:
Sum insured Value Loss Amount Payable

Rs. Rs. Rs. Rs.
Building 1,00,000/- 1,00,000/- - -
Machinery 3,00,000/- 2,00,000/- - -
Stocks 5,00,000/- 6,00,000/- 60,000/- 50,000/-
Total 9,00,000/- 9,00,000/-
In the above example the total sum insured corresponds with the total value but
the stocks are under insured. Hence this item is separately subject to average
and the amount of loss is proportionately reduced.
Fire insurance rates are determined on the assumption that property is

insured for its full value. If the amount insured is less than the full value,
the insured pays premium, that is, less than the due contribution to the
common premium fund. The condition ensures that the sum insured is
adequately fixed by the insured.
x. This is usual contribution condition. If there is more than one policy

covering the same property by similar peril, in the event of loss, the
company will be liable to pay only the rateable proportion of the loss.
Rateable proportion of the policy may be defined as that proportion of the

loss as the sum insured under the policy bears to the total sum insured under
all the policies.

xi. This is the subrogation condition. Insured’s rights and remedies to

obtain relief or indemnity from other parties are subrogated to the
insurers, who are entitled to these rights even before they indemnify the
loss.
The condition also provides that the insured shall, at the expense of the
company, render assistance to the company for enforcing these rights and
remedies against the other parties responsible for the loss.
xii. The arbitration condition provides as follows:
 Any dispute or difference as to the quantum to be paid under this

policy shall, independently of all other questions, be referred to
arbitration.
 No dispute or difference shall be referred to arbitration, if the

company has disputed or not accepted liability under the policy.
 A sole arbitrator is to be appointed in writing by the parties.
 If the parties cannot agree upon a single arbitrator within 30 days of

any party invoking arbitration the same shall be referred to a panel
of three arbitrators, one to be appointed by each of the parties and
the third arbitrator to be appointed by such two arbitrators.
 Arbitration shall be conducted under the provisions of the Arbitration

and Conciliation Act, 1996.
 The award by arbitrator(s) shall be a condition precedent to any right

of action or suit upon the policy.
 The object of this condition is to ensure that disputes are settled

quickly.
 Arbitration procedure is less expensive than Litigation. Arbitration is

also a private process. Hence, it avoids undue publicity to the
insurers of an adverse nature.
xiii. Every notice or other communication to the company required by the

conditions must be written or printed.
xiv. The full sum insured has to be maintained throughout the currency
of the policy. Upon the settlement of loss pro-rata premium from the
date of loss to the date of expiry shall be payable by the insured. The
extra premium shall be deducted from the net claim payable.

The continuous cover to the full extent will be available not withstanding
any previous loss for which the company may have paid and irrespective of
the fact whether the additional premium has been actually paid or not
following such loss.
In case the insured immediately on occurrence of the loss exercises his

option not to reinstate the sum insured, then the sum insured shall stand
reduced by the amount of the loss.
Test Yourself 2
Damage to the stocks in cold storage premises is:
I Generally always excluded from fire policy

II Generally included in fire policy
III Generally excluded in fire policy but may be covered by endorsement under
"add-ons"
IV Is included in fire policy only if the cold storge has fire-privention facilities

SUMMARY CHAPTER 1
Summary
a) The subject matter of fire insurance may be any kind of moveable and
immovable property having pecuniary value.
b) Fire Insurance contracts are governed by the general law of contract as

embodied in the Indian Contract Act, 1872.
c) Fire insurance is governed by basic principles evolved under common law.

These include: Utmost good faith, Principle of Indemnity, Insurable Interest,
Proximate Cause, Contribution and Subrogation.
d) The sum insured is to be fixed by the insured.
e) The sum insured should represent the actual value of the property insured.
If there is over-insurance, there is no benefit to the insured; if there is
under-insurance, the claim amount will be proportionately reduced by
applying pro-rata average.
f) Fire insurance business was governed by the All India Fire Tariff. The Tariff
Advisory Committee have laid down rules, regulations, rates, advantages,
terms and conditions for fire insurance business in India under the provisions
of Part IIB of the Insurance Act, 1938.
g) The fire policy form consists of three main parts: Operative clause, General
exclusions and General conditions.
h) Perils covered generally include: fire, lightning, aircraft damage,

explosions, implosions, aircraft damage, riots, strike, terrorism damage,
storm, cyclones, hurricanes, tornados, bush fire, leakage, bush fire, etc.
i) There are generally thirteen exclusions prescribed in a fire policy.
j) There are generally fifteen conditions prescribed in a fire policy.

CHAPTER 1 SUMMARY
Key Terms
a) Fire insurance business
b) Utmost good faith
c) Subrogation
d) Contribution
e) Insurable interest
f) Principle of indemnity
g) Proximate cause
h) Market value
i) Reinstatement value
j) Fire Tariff
k) Operative Clause
l) Terrorism damage
m) Indemnity condition
n) Pro-rata average condition
o) Arbitration condition

PRACTICE QUESTIONS AND ANSWERS CHAPTER 1
Answers to Test Yourself
Answer 1
The correct option is IV.
The principle of subrogation and principle of contribution are corrolories to

principle of indemnity
Answer 2
The correct option is III.
Damage to the stocks in cold storage premises is generally excluded but may be
covered by endorsement under "add-ons".
Self-Examination Questions
Question 1
Which one of the following principle is a corollary of the principle of indemnity?
I Principle of subrogation
II Principle of insurable interest
III Principle of utmost good faith
IV Principle of proximate cause
Question 2
Which principle of insurance gives legal validity to insurance contracts?
I Principle of contribution
II Principle of insurable interest
III Principle of utmost good faith
IV Principle of proximate cause
Question 3
Mr. X has a value of property of Rs 1,00,000. Sum insured is Rs. 75,000. Loss
incurred due to fire is Rs. 35,000.
Determine the amount of claim payable under a fire insurance contract.
I Rs. 26,250
II Rs. 35,000
III Rs. 46,667
IV Rs. 75,000

CHAPTER 1 PRACTICE QUESTIONS AND ANSWERS
Question 4
The sum insured in a fire insurance contract can be fixed on:
I Cost of asset
II Reinstatement value
III Nominal value
IV Rateable value
Answers to Self-Examination Questions
Answer 1
The correct option is I.
The principle of subrogation is a corollary of the principle of indemnity. If the

loss suffered by the insured is recoverable from third parties who are
responsible for the loss, the insured’s rights of recovery are transferred or
subrogated to the insurers when they indemnify the loss.
Answer 2
The correct option is II.
The requirement of insurable interest gives legal validity to insurance contracts

and distinguishes them from mere wagers. Insurable interest may be defined as
the legal right to insure which right arises out of a pecuniary relationship
between the insured and the subject matter of insurance whereby destruction
or damage to the latter involves the insured in financial loss
Answer 3
According to the pro-rata average condition, Rs. 75,000 / Rs. 100,000 x Rs.
35,000 = Rs. 26,250.
Answer 4
The sum insured can be fixed on reinstatement value or market value, or agreed
value.

CHAPTER 2
ADD ON COVERS AND SPECIAL POLICIES
Insurance companies offer various ‘add on’ covers along with fire insurance on
payment of additional premium. These add on covers are granted by
attachment of endorsements. These extensions relate to additional perils or
additional coverage. Also there are various different clauses present for special
purposes in fire insurance.
In this chapter we will examine these add on covers and various clauses present
in fire insurance policies. We will also study about Declaration Policies and
Floater Policies. Towards the end of the chapter we will study about some of
the clauses which are present for special purposes in fire insurance.
Learning Outcomes
A. Add on covers
B. Various Clauses
C. Declaration Policies
D. Floater Policies
E. Special Clauses

CHAPTER 2 ADD ON COVERS
A. Add on covers
Add on covers are extensions of the fire policy on payment of additional

premium and granted by attachment of endorsements. These extensions relate
to additional perils (earlier known as special perils) or additional coverages.
The sum insured of add on peril is kept identical to sum insured of the policy.
Diagram 1: Add on covers

ADD ON COVERS CHAPTER 2
1. Spontaneous Combustion (by Fire Only)
The operative clause of the fire policy provides cover in respect of fire but
excludes damage caused to the insured property by “its own fermentation,
natural heating or spontaneous combustion”. (See chapter 1)
The extension endorsement reads as follows:
In consideration of the payment by the Insured to the Company of additional

premium of Rs……… the company agrees notwithstanding what is stated in the
policy to the contrary that the insurance by (items) of this policy shall extend to
include loss or ‘damage by fire only’ of or to the property insured caused by its
own fermentation, natural heating or spontaneous combustion.
The expression “by fire only” in the endorsement cannot be omitted under any
circumstance. Thus, the additional cover provided is only in respect of only fire
damage, as a result of spontaneous combustion.
The value on which premium is charged is based on relative combustibility of a

commodity. The rate of premium varies according to category of commodities.
The classification of materials is based on severity of spontaneous combustion

properties, placed under four categories as given below:
Category Rate per mile

I-Low or non-existent 0.25
II-Moderate 0.50
III-Variable 0.75
IV-High 1.00
The tariff provides a detailed list of commodities. For purpose of illustration

some examples are provided below.
Example
Category I
Betel Nuts Cardamom

Castor Oil Chillies
Coconut Oil Clean Cotton (Loose and / or in bales
including clean Cotton Waste)
Cotton Seed Copra, Copra Seed, Copra Meal
Groundnut Oil Grains and / or seeds
Hides Groundnut (Shelled)
Jute in bales and / or loose Matches
Petroleum Products Saw Dust
Bamboo Stocks Tobacco-Loose and / or in bags
Beedi Leaves and Beedies Sugar
Black Pepper

Category II
Cotton Seed de-oiled cake Cotton Seed Oil

Foam Rubber Goods Groundnut (de-oiled Caked)
Hay and Grass Lubricants excluding Petroleum Products
Karadi oil Tarpaulin
Oil Cake-Loose and / or in Soyabean Oil
bags
Cardboards Waste Paper
Copra Cake
Category III
Gunnies or Bardan Fire Wood

Paints and Varnish Oily Cotton
excluding Synthetic Enamel
Coaltar Rags
Dyes and / or Chemicals
Category IV
Alfalfa Meal Codliver Oil

Corn Meal Feeds Empire Cloth
Fish Meal Fish Oil
Fish Manure Fish Scrap
Lard Oil (Commercial or Linseed Oil
Animal Oils)
Nitro Cellulose Lacquers Oiled Clothing
Oiled Fabrics Oiled Rags
Oiled Silk Groundnut (Red Skin)
Synthetic Enamels Tunginut Meals
Varnished Fabrics Waste of all kinds (Except wool and paper
waste) including Oily and / or greasy
waste.
2. Earthquake (Fire and Shock)
The cover is available for Earthquake Fire Only or Earthquake (Fire and Shock
both).
Earthquake cover shall be granted only if the entire property is in one complex/
compound / extension is identical to the sum insured against the risk covered
under main policy except for the value of the plinths and foundations of the
buildings.

The extension endorsement reads as follows:
“In consideration of an additional premium of Rs……. it is hereby agreed and

declared that this Insurance is extended to cover loss or damage (including loss
or damage by fire) to any of the property Insured by this policy occasioned by or
through or in consequence of earthquake including Land slide / Rock slide
resulting there from, but excluding flood or overflow of the sea, lakes,
reservoirs and rivers caused by Earthquake except when STFI cover is opted
out.
Provided always that all the conditions of this policy shall apply (except in so
far as they may be hereby expressly varied) and that any reference therein to
loss or damage by fire shall be deemed to apply also to loss or damage directly
caused by any of the perils which this insurance extends to include by virtue of
this endorsement.”
Note 1: Earth quake clause does not cover losses caused by STFI perils and vice
versa.
Note 2: The Earthquake (Fire and Shock) cover in conjunction with STFI is
essential to cover Tsunami damages. If either of the two perils are not
simultaneously covered Tsunami risk is not covered.
a) Special Conditions
i. Excess Clause
Each and every claim under this add on cover is subject to a deductible of
5% of the net claim amount.
ii. Onus of proof clause
In the event of the Insured making any claim for loss or damage under this
policy he must (if so required by the company) prove that the loss or
damage was occasioned by or through or in consequence of earthquake.
The provisions of the extension are:
 Cove rage applies to both concussion or shock damage and fire damage.
 Coverage also applies to flood or overflow of the sea, lakes, reservoirs

and rivers caused by earthquake, but not if storm, tempest, flood and
inundation perils are deleted from the fire policy.
 All the conditions of the fire policy apply to this extension (except in so
far as they may be expressly varied in the extension clause.)

 Each and every claim is subject to a deductible of 5% of the net claim

amount.
 Onus of proof of loss is on the insured (if so required by the company).
b) Rates of Premium are charged according to location
i. SFSP basic rate: First the applicable SFSP (Standard Fire & Special
Perils) basic rate for the risk is to be identified from the erstwhile tariff.
ii. FLEXA (Fire, Lightning, Explosion, Aircraft) Tariff rate: From this SFSP
basic rate STFI deletion discounts as given in the tariff and amended as
per the discussions (for Residential and non industrial 0.15 per mille,
Industrial 0.25 per mille and for stock in open a rate of 0.25 per mille) is
to be reduced. This would give the ‘FLEXA Tariff rate’.
iii. Detariffed FLEXA rate: Detariffed FLEXA rate is arrived at by applying

loading/discount on this FLEXA Tariff rate.
iv. Rate applicable from 01-03-2012: To the De tariff FLEXA rate, agreed
Min STFI rate as per occupancy and EQ rate as per the EQ Zone is to be
added back. The rate thus arrived is to be charged for the risks incepting
after 1st of March 2012.
c) Earthquake rates to be charged
For Earthquake, the rates have been adopted zone wise and Industrial and
Non Industrial category wise which is as under. The Zones are classified as
per the current zones in the erstwhile tariff.
Zone IV III II I
Non-industrial: Dwellings, Hotels, Shops as per
Section III of ET 0.05 0.05 0.05 0.05
Industrial: Including Standalone storage, outside
the manufacturing Units, Utilities outside
manufacturing units (All Sections except III of ET) 0.05 0.1 0.25 0.5

d) FLEXA (Fire, Lightning, Explosion, Aircraft Insurance)
Tropical Cyclone Classifications (all winds are 10-minute averages)

The 10-minute NE Pacific NW Pacific NW Pacific N Indian SW Indian Australia &
Beaufort sustained & JTWC JMA Ocean Ocean S Pacific
scale winds N Atlantic IMD MF BOM/FMS
NHC/CPHC
0–6 <28 knots Tropical Tropical Tropical Depression Zone of Tropical
(32 mph; Depression Depression Depression Disturbed Disturbance
52 km/h) Weather Tropical
7 28–29 knots Deep Tropical Depression
(32– Depression Disturbance Tropical Low
33 mph; Tropical
52– Depression
54 km/h)
30–33 knots Tropical Tropical
(35– Storm Storm
38 mph;
56–
61 km/h)
8–9 34–47 knots Tropical Cyclonic Moderate Category 1
(39– Storm Storm Tropical tropical
54 mph; Storm cyclone
63–
87 km/h)
10 48–55 knots Severe Severe Severe Category 2
(55– Tropical Cyclonic Tropical tropical
63 mph; Storm Storm Storm cyclone
89–
102 km/h)
11 56–63 knots Category 1 Typhoon
(64– hurricane
72 mph;
104–
117 km/h)
12 64–72 knots Typhoon Very Tropical Category 3
(74– Severe Cyclone severe
83 mph; Cyclonic tropical
119– Storm cyclone
133 km/h)
13 73–85 knots Category 2
(84– hurricane
98 mph;
135–
157 km/h)
14 86–89 knots Category 4
(99– severe
102 mph; tropical
159– cyclone
165 km/h)
15 90–106 Category 3 Intense
knots (100– hurricane Tropical
122 mph; Cyclone
170–
196 km/h)
16 107–114 Category 5
knots (123– severe
131 mph; tropical
198– cyclone
211 km/h)
17 115–135 Category 4 Super Very Intense
knots (132– hurricane Cyclonic Tropical
155 mph; Storm Cyclone
213–
250 km/h)
>136 knots Category 5 Super
(157 mph; hurricane Typhoon
252 km/h)

e) The Tariff provides a State wise and District wise classification of

earthquake zones. A few examples are provided below:
State / Union Territory Zone Districts
Andaman & Nicobar Islands I Entire Union Territory

Andhra Pradesh III West Godavari, Krishna
IV Chitoor, Nellore, Cuddapah
Arunachal Pradesh I Entire State
Assam I Entire State
Bihar III Gaya,
Jharkhand III Dhanbad
IV Ranchi
Chandigarh II Entire Union Territory
Delhi II Entire State
Goa III Entire State
Gujarat I Kutch
II Jamnagar
III Rajkot, Ahmedabad, Bhavnagar,
Surat, Union Territories of Diu,
Daman, Dadra and Nagar Haveli
Haryana II Ambala, Faridabad
III Hissar
Himachal Pradesh II Shimla
Jammu & Kashmir I Srinagar
Karnataka III Dakshin Kannad
IV Belgaum, Dharwad, Chikmagalur,
Bangalore, Uttar Kannad
Kerala III Entire State and Mahe (Pondicherry)
Lakshadweep IV Entire Union Territory
Madhya Pradesh III Jabalpur
IV Bhopal, Indore, Ujjain
Maharashtra I Ratnagiri, Satara
III Kolhapur, Pune, Nasik, Thane,
Greater Bombay
IV Sangli, Solapur, Latur, Ahmednagar,
Aurangabad, Nagpur
Manipur I Entire State
Meghalaya I Entire State
Mizoram I Entire State
Nagaland I Entire State
Orissa III Cuttack
IV Puri
Pondicherry IV Entire Union Territory
Punjab II Jalandhar, Ludhiana
III Patiala

Rajasthan III Jaisalmer

IV Jodhpur, Jaipur, Ajmer, Udaipur
Sikkim II Entire State
Tamilnadu III Coimbatore, Tirunelveli
IV North Arcot, South Arcot, Madras
Tripura I Entire State
Uttarakhand II Uttarkashi, Dehradun, Nainital.
Uttar Pradesh II Meerut
III Bareilly, Agra, Lucknow, Varanasi
IV Kanpur, Allahabad
West Bengal II Darjeeling, Jalpaiguri, Calcutta
III Howrah.
IV Puruliya.
Note: Dwellings, Offices, Shops, etc. ratable under Section III of the Tariff are
rated at Re. 0.05 per mille regardless of the zones.
3. Forest Fire
The fire policy covers bush fire but excludes forest Fire. The extension includes
loss of or damage to the property insured directly caused by burning, whether
accidental or otherwise, of forest, jungles and clearing of lands by fire. The
rate of premium is determined subject to five years claims experience discount
/ loadings.
4. Impact damage due to Insured’s own Vehicles and the articles dropped
from them.
The extension covers loss and / or damage by direct impact to insured’s

property caused by insured’s own power driven vehicles, forklifts, cranes,
stackers and / or caused by articles dropped there from.
Note: See Chapter 1 for “Impact damage” cover under the fire policy. The add
on clause does not include loss or damage due to insured’s own animals.
5. Deterioration of Stocks in Cold Storage premises due to accidental power

failure consequent to damage at the premises of Power station due to an
insured peril.
It will be recalled that the fire policy excludes loss or damage to the stocks in
cold storage premises caused by change of temperature. (See exclusion 6 of the
Fire policy in Chapter 1).
The extension covers destruction of or damage to the property insured caused

by change of temperature:

a) in consequence of failure of electric supply at the terminal ends of the

electric service feeders
b) from which the insured obtains electric supply
c) directly due to damage caused by any peril insured against under this
policy to property at insured premises or any electric station or
substation of public electric supply undertaking from which insured
obtains electric supply.
Exclusions
i. The company shall not be liable for any loss occasioned by the deliberate
act of the Government, Municipal or Local authority or Supply authority
not performed for the sole purpose of safeguarding life or protecting any
part of the supply undertaking’s system or
ii. By the exercise by any such authority of its power to withhold or restrict
or ration supply not necessitated solely by damage to the Supply
Undertaking’s generating or supply equipment by an insured peril.
iii. For any loss unless duration of each such failure exceeds 24 hrs.
The extension is subject otherwise to the terms, extensions, condition and

limitations of this policy.
6. Deterioration of stocks in cold storage premises due to change in

temperature arising out of loss or damage to the cold storage machinery
(ies) in the insured’s premises due to operation of insured peril.
The damage occurring to the insured’s machinery equipment or premises due to

an insured peril is covered under basic Fire policy but the damage to stocks may
be due to change in temperature because the machinery maintaining the
temperature has been damaged due to an insured peril i.e., the operating peril
may not have caused the direct damage to the stocks.
The policy does not cover any liability for any loss unless the duration of each
such failure exceeds 24 hours. The burden of proving that the loss or damage is
covered shall be upon the insured.
7. Architects, etc Fees (in excess of 3%)
As per exclusion (viii) the fire policy covers Architects, etc fees up to 3% of the
claim amount. (See chapter 1).
The Add on permits expenses up to 7.5% of admitted loss towards fees in

connection with superintendence of the reinstatement for building, machinery,
accessories and equipment.

The extension endorsement provides as follows:
“On payment of additional premium of Rs. ……… the policy is extended to cover
an additional amount of Rs. ……….. as declared by the Insured towards such
expenses for Architects, Surveyors and Consulting Engineers’ fees in excess of
3% of the claim amount not exceeding the amount declared above.”
The rate for the extension is the rate applicable to the fire policy of specified
sum insured not exceeding 7.50% of the claim amount, cost and expenses
necessarily event of incurred.
It is to be understood that this add on does not cover cost in connection with
the preparation of insured’s claim or estimate of loss in the event of damage by
insured’s perils.
8. Debris Removal (in excess of 1%)
The extension endorsement provides cover for Debris Removal in excess of

1%up to 10.00% reads as follows:
“On payment of an additional premium of Rs…………. the policy is extended to

cover an additional amount of Rs……… towards costs and expenses necessarily
incurred by the insured in excess of 1% of the claim amount but not exceeding
the amount declared above.”
The rate applicable is the rate for the fire policy.
9. Omission to insure, Additions, Alterations or Extensions Clause
The extension is applicable to all new buildings and/or Machinery, plant and
other contents (means furniture and fittings and not stocks) declared, which the
insured may erect or acquire or for which they may become responsible.
The insured, is required to notify and pay premium. The cover is fully
reinstated. If insured fails to declare at the end of the policy period within 30
days of expiry of policy, there shall be no refund of the premium.
By this clause, which is incorporated at the time of issuing the policy, the
insurance is extended to cover Buildings and / or Machinery, Plant, Furniture
and Fittings (but not stocks) as defined in the Schedule of the policy which the
insured may erect or acquire or for which they may become responsible
 at the within described premises,
 for use as factories

The salient features of this clause are:
a) The liability under this extension shall not exceed 5% of the sum insured
under the relevant property.
b) Additional premium on 5% of the sum insured at the policy rate is

collected in advance.
c) The insured shall notify each additional insurance as soon as it comes to

their knowledge and pay additional premium thereon from the date of
inception.
d) Following this advice of additional insurance, cover under this extension

is fully reinstated.
e) No liability shall attach to the insurers while property to which the

extension applies is otherwise insured.
10. Spoilage Material Damage Cover
The policy may be extended to cover material damage by perils causing

spoilage, same as in fire policy to
a) Loss of stock in process
b) Damage to machinery, containers and equipment (including cost of

removal of debris and cleaning)
The cover must be for all stocks and machinery, containers and equipment sum
being declared for each block and subject to condition of average.
11. Leakage and Contamination cover
The policy may be extended to cover accidental leakage and contamination or

accidental leakage and applies to oils and chemicals only. The cover is for
physical loss by leakage by its container due to accidental leakage and all
accidental contaminations by contact with foreign matters.
12. Temporary Removal of Stocks Clause
The stocks not exceeding 10% of Total Sum Insured removed for fabrication, or
processing, or finishing or other similar purposes subject to application of
prorata condition of average on total stocks temporarily removed vis a vis total
sum insured of stocks.

13. Loss of Rent Clause
Only if the said building or any part is unfit for occupation in consequence of its
destruction or damage by perils insured and the amount payable shall not
exceed such portion of the sum insured on Rent as the period necessary for
reinstatement bears to the rent insured.
14. Insurance of Additional Expenses of Rent for An Alternative

Accommodation
This extension is for non manufacturing premises only under material damage
(Fire Policy); excluding building of kutcha construction; unfit for occupation; for
a maximum period of indemnity not to exceed three years.
The additional rent is difference actually paid on production of Certificate from

Municipal authorities or Architect to the effect that the premises is
untenantable. The cover is for all perils covered under fire policy except in case
of riot and strike and malicious damage, the cover is limited to actual physical
damage to the building and not for entry of insured barred by strikers,
demonstrators or similar occurrences. There is no bar on alternative location as
long as it is within the same city or town.
The cover may be permitted to tenant covering contents while owner occupant
covering has to cover compulsorily both building and contents for the limited
area under his occupation. The standard rent is based on ratable values fixed by
Municipal Authorities/ Revenue Authorities for tax purposes as original rent for
owner occupant.
If the tenant is obliged to pay rent for the premises even during the period for
which it is not fit for occupation the additional rent borne by him shall be the
actual rent for the alternative accommodation.
If the tenant is not obliged to pay rent for the premises, the additional rent
borne by him is the actual rent paid for alternative accommodation less the rent
which he was paying immediately prior to damage by insured perils and
rendered unfit for occupation.
15. Start up Expenses
The policy to cover start up costs necessarily and reasonably incurred

consequent upon loss or damage by this policy.

CHAPTER 2 VARIOUS CLAUSES
Test Yourself 1
Which of the following policy clause provides cover for accidental leakage and
contamination of oils and chemicals?
I. Temporary removal of stocks clause

II. Debris Removal clause
III. Spoilage Material Damage clause
IV. Leakage and Contamination clause
B. Various Clauses
1. Escalation clause
Escalation of Sum Insured is applicable for Building, Machinery and Accessories

and not for Stocks. Escalation clause provides an automatic increase in sum
insured from the day of inception of cover.
The sum Insured in force at the time of commencement of the Policy is allowed
to increase on daily basis to the extent of 1/365 of specified percentage.
The maximum increase in percentage allowed is up to 25% of sum insured from

the day of inception of policy. The premium charged is 50% of the final rate on
the specified increase in sum insured.
2. Reinstatement Value Policies (RIV) clause
The reinstatement value policy provides a basis of fixing sum insured on the fire
policy form with a Reinstatement Value memorandum incorporated therein.
This form of insurance was introduced in the U.K. during the inflationary
conditions that prevailed after the First World War. The cost of re-building
factories and the prices of machinery had increased to such an extent that the
indemnity provided under the fire policy was far from adequate.
Moreover, depreciation funds, normally provided by the business concerns in

their annual accounts, were not sufficient to fill the gap between the amount
payable under fire policies and the cost of new buildings and plant. It was in
these circumstances that the reinstatement or replacement value policies were
introduced.
a) This RIV policy is issued in respect of building, plant, machinery,

furniture, fixture and fittings only and not on stocks.
b) This RIV Policy differs from the fire policy in the basis of fixing the
sum insured and settlement of claims.

VARIOUS CLAUSES CHAPTER 2
i. Under the fire policy, claims are settled on the basis of the market value
of the insured property immediately before the fire. The market value is
arrived at strictly according to the principle of indemnity that is by
taking into account depreciation, wear and tear, etc.
Under the Reinstatement Value Policy the payment to be made is the cost of
reinstatement of the building or the cost of replacement of the machinery
to a condition equal to but not better or more extensive than its condition
when new.
Thus, under this policy it is possible to recover the cost of replacement of

the damaged property by new property but of the same kind and not the
depreciated value of building or machinery. If the property is damaged, the
cost of making good that damage is paid.
ii. Under the fire policy, market value is the Sum insured; under
Reinstatement policy, new reinstatement or new replacement value two
years hence, is the appropriate sum insured on the date of inception of
cover.
c) The operative part of the Reinstatement Value clause reads:
“It is hereby declared and agreed that in the event of the property insured
under item Nos. ……….. of the within policy being destroyed or damaged, the
basis upon which the amount payable under each of the said item of the
policy is to be calculated, shall be the cost of replacing or reinstating on the
same site or any other site, property of the same kind or type, but not
superior to or more extensive than the insured property when new as on the
date of the loss.”
The words “property of the same kind and type” are important. This means,
for example, textile machinery cannot be replaced by chemical machinery,
or if looms are destroyed they cannot be replaced by spinning machinery or
winding or warping machinery.
Equally important are the words “not superior to or more extensive than the
insured property when new as on the date of the loss.”
i. The damaged property is replaced by new property, but not by the new
property which is in any way superior to the insured property, when
new. If, due to technical improvements the replaced machinery is better
than the damaged machinery for example, output is increased with less
consumption of power; the insured is obliged to bear a part of the cost
of the new machinery to ensure that he does not derive any undue
benefit.

ii. As far as possible, the new machinery should be of the same production
capacity, producing product more or less of the same quality. Identical is
the main but not the sole criterion. Each case is considered on merits to
establish the level of improvements, if any, in the new machine and
decision on allowances and adjustments is taken through negotiations.
iii. Due to technological progress, replacement of manually operated

machines with automatic or semi-automatic machine may be possible
and desired by the insured. In such cases, substitution by less or more
number of such improved machines giving the more or less, the same
production, is agreed, subject to any additional benefit accruing to the
insured being debited to the insured’s account.
Similarly, the new building should not be more extensive than or superior to
the one destroyed.
Example
The new building should not be covering a larger floor area or of a superior
construction, employing materials of superior quality or durability or higher
cost.
Again, as in the case of machinery, if any betterment accrues to the insured,

he is made to contribute towards the cost of betterments.
iv. Loss settlement on total loss of building and machinery has been
considered. In the event of partial damage to the building or machinery
the basis of settlement is the cost of repair without taking into account
depreciation.
d) There are four provisos in the Reinstatement clause
i. The work of reinstatement must be commenced and carried out by the

insured with reasonable dispatch and in any case, must be completed
within 12 months after the destruction or damage, or within such
extended time as may be allowed by insurers, failing which the loss will
be settled on the basis of indemnity (market value) according to the fire
policy.
Reinstatement or replacement may be carried out upon another site and

in manner suitable to the requirements of the insured subject to the
liability of the company not being thereby increased.
ii. Until reinstatement is not carried out by the insured, the liability of the
company is limited to the normal indemnity basis.

VARIOUS CLAUSES CHAPTER 2
iii. Proviso 3 relates to application of pro-rata average. If at the time of

reinstatement or replacement, the cost of reinstatement or replacement
(if the whole property had been destroyed) exceeds the sum insured at
the time of loss, there is deemed to be underinsurance and the insured
has to bear a rate able proportion of the loss.
It is to be noted that the cost at the time of reinstatement is considered.

Therefore, it is advantageous to the insured to complete reinstatement
as expeditiously as possible. Secondly, the proviso emphasises the need
for fixing an adequate sum insured taking into account future cost and
the inflation factor.
iv. The reinstatement basis of settlement will not apply in the following
circumstances.
 If the insured fails to intimate to the insurer within 6 months or any

extended time from the date of loss, his intention to replace the
damaged property.
 If the insured is unable or unwilling to replace the damaged

property.
In such cases, the loss will be settled on the normal basis of indemnity.
Note: There are distinct differences between Reinstatement Value policy

and reinstatement under condition No. 9 of the Fire policy. Under the latter,
reinstatement is at the option of the company and maximum liability in any
case is limited to the cost of reinstating the property to its pre-loss
condition.(Refer to Chapter 1) While in reinstatement value memorandum
the insured has to exercise his intention to reinstate damaged property in
stipulated time as above due to prevailing regulations at the time of
reinstatement.
3. Local Authorities Clause
Reinstatement Value Policy may be extended to cover additional cost of

reinstatement incurred by the insured to comply with regulations enforced by
Authorities by incorporating the following Local Authorities clause in the policy.
“The insurance by this policy extends to include such additional cost of

reinstatement of the destroyed or damaged property hereby insured as may be
incurred solely by reason of the necessity to comply with the Building or other
Regulations framed in pursuance of any act of Parliament or with Bye-laws of
any Municipal or Local authority”.

Provisos
a) The amount recoverable under this extension shall not include:
i. the cost incurred in complying with any Regulations or Bye-laws,
 in respect of destruction or damage occurring prior to the

granting of this extension, or
 damage not insured by the policy,
 under which notice has been served upon the insured prior to the
happening of the destruction of damage,
 in respect of undamaged property or undamaged portions of

property other than foundations (unless foundations are
specifically excluded from the insurance by this policy) of that
portion of the property destroyed or damaged,
ii. the additional cost that would have been required to make good the
property damaged or destroyed to a condition equal to its condition
when new had the necessity to comply with any of the aforesaid
Regulations of Bye-laws not arisen,
iii. the amount of any rate, tax, duty, development or other charge or
assessment arising out of capital appreciation which may be payable
in respect of the property or by the owner thereof by reason of
compliance with any of the aforesaid Regulations or Bye-laws.
b) The work of reinstatement must be commenced and carried out with

reasonable dispatch and in any case must be completed within twelve
months after the destruction or damage or within such further time as
the insurers may (during the said twelve months) in writing allow and
may be carried out wholly or partially upon another site (if the aforesaid
Regulations or Bye-laws so necessitate) subject to the liability of the
Insurer under this extension not being thereby increased.
c) If the liability of the insurer under (any item of) the policy apart from
this extension shall be reduced by the application of any of the terms
and conditions of the policy, then the liability of the Insurers under this
extension (in respect of any such item) shall be reduced in like
proportion.
d) The total amount recoverable under any item of the policy shall not
exceed the sum insured thereby.
e) All the conditions of the policy except in so far as they may be hereby
expressly varied shall apply as if they had been incorporated herein.

DECLARATION POLICIES CHAPTER 2
f) No additional premium shall be charged for inclusion of this clause in this

policy.
Test Yourself 2

Authorities by incorporating which of the following clause in the policy?
I. Escalation clause
II. RIV clause
III. Local Authorities clause
IV. Debris Removal clause
C. Declaration Policies
Stocks which are subject to frequent fluctuations in value, or in quantity,

present a problem for issuing insurance policy. The sum insured under the fire
policy may be increased or decreased by endorsement with consequent
adjustment of premium, extra or refund, as the case may be. This would mean
additional administrative work both for the insurer and the insured.
The problem is solved by the issue of a declaration policy, which is in fact, a

Fire policy with a Declaration clause attached to it. The insured can fix a
‘provisional sum insured’ which represents the highest value of stocks at any
point of time during the policy period. The premium paid on this sum insured is
subject to adjustment on expiry of the period of insurance.
1. Provisions of Declaration policies
The salient provisions of the Declaration Clause termed as special conditions are
as follows:
a) The Insured agrees to declare to his Insurance Company in writing the

value of his stocks (other than retail) less any amount insured by policies
other than declaration policies, in each detached building or non-
communicating compartment or in the open.
i. The basis of monthly declaration is
 average of the highest value at risk on each day of the month or

 the highest value on any day of the month
ii. The declarations shall be submitted by the insured latest by the last
day of the succeeding month.

CHAPTER 2 DECLARATION POLICIES
iii. In the event of a declaration not being made within the specified
period, then the insured shall be deemed to have declared the sum
insured hereby as the ‘value at risk’.
iv. If other policies on declaration basis cover the stocks hereby insured,
the declarations shall be made so as to apportion to each policy a
share of the value of the stocks insured under such declaration
policies, pro rata to the respective amounts named in the policies.
v. The basis of valuation for declarations shall be the Market value and
any loss hereunder shall be settled on the basis of the Market Value
immediately anterior to the loss.
b) On the expiry of period of insurance the premium shall be calculated at

the rate of ………….. (insert the rate) on the average sum insured namely,
the total of the values declared or deemed to have been declared
divided by the number of declarations deemed to have been made.
If the resultant premium is less than the provisional premium, the

difference shall be repaid to the Insured but such repayment shall not
exceed 50% of the provisional premium.
c) The maximum liability of the company shall not exceed the Sum Insured
hereby and premium shall not be receivable on value in excess thereof.
i. The Sum Insured maybe, however, increased by prior agreement with

the company, in which event the new Sum Insured and the date from
which revised Sum Insured is effective will be recorded on the policy
by an endorsement.
ii. In the event of an increase in the Sum Insured being agreed to, the
Company shall charge on such increased sum an additional
provisional premium on a basis proportionate to the unexpired period
of the policy and upon expiry of each period of insurance the total
provisional premium so paid shall be adjusted as provided for in
these special conditions.
iii. If during the currency of the policy, the rate for the class of risk to
which the insurance applies is revised, and an increase in the Sum
Insured under a Declaration Policy is agreed to, the company shall
charge on such increased sum an additional provisional premium on a
basis proportionate to the unexpired period of policy, at the rate at
which the insurance was originally effected and upon the expiry of
each period of insurance the total provisional premium so paid shall
be adjusted as provided for in these Special Conditions.

d) If after the occurrence of a loss it is found that the amount of the last
declaration previous to the loss is less than the amount that ought to
have been declared, then the amount which would have been
recoverable by the Insured shall be reduced in such proportion as the
amount of the said last declaration bears to the amount that ought to
have been declared. (This is the first pro-rata average condition).
e) Notwithstanding the occurrence of loss it is understood that the Sum

Insured will be maintained at all times during the currency of the policy
and the Insured, therefore, undertakes to pay extra premium on the
amount of any loss pro-rata from the date of such loss to the expiry of
the period of insurance.
The premium is calculated at the rate applicable to the stocks destroyed

and such extra premium shall not be taken into account in, and shall be
distinct from, the final adjustment of premium.
f) In event of this policy being cancelled by the Insured during its currency
(whether stocks exist or not) the premium to be retained by the
company shall be the PRO RATA proportion of the premium calculated on
the average amount insured up to the date of cancellation plus the PRO
RATA proportion of the premium from the date of loss to the expiry of
the period of insurance on the amount of the loss paid, or 50% of the
provisional premium whichever is greater.
g) If the stocks hereby insured shall at the time of loss 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 a
ratable proportion of the loss accordingly. Every item, if more than one,
on stock shall be separately subject to this condition.(This is the second
pro-rata average condition)
h) If at the time of any loss, there be any other insurance (other than on
declaration basis) covering the stocks insured by this policy, that policy
will operate first and pay the claim.
This condition under declaration policy shall apply only to the excess of
the value of such stocks at the time of loss over the sum insured under
the other policy.
Further, the company shall be liable, under this declaration policy, to

pay or contribute only a proportion of such loss which such excess (or, if
there be other declaration insurance covering the same stocks, a ratable
proportion of such excess) but not exceeding the sum insured hereby,
bears to the total value of the stocks.
i) It is warranted that every other policy on a declaration basis covering

the stocks insured hereby shall be identical in wording with this policy.

CHAPTER 2 DECLARATION POLICIES
j) This insurance is subject in all respects to the printed conditions of the

policy except in so far as they may be varied by these Special Conditions.
Example
Sum Insured : Rs. 2,00,00,000 (2 crores)

Rate : Re. 1.00 per mille
Provisional Premium : Rs. 20,000.
Monthly Declarations:
Rs. (in lakhs)

January .. .. .. 16
February .. .. .. 18
March .. .. .. 18
April .. .. .. 18
May .. .. .. 16
June .. .. .. 14
July .. .. .. 12
August .. .. .. 14
September .. .. .. 14
October .. .. .. 16
November .. .. .. 18
December .. .. .. 18
Total Declaration .. .. .. 192
Rs.
Average of declarations 1,60,00,000
Premium on average amount 16,000
Rs.
Provisional Premium 20,000
Actual Premium 16,000
Refund 4,000
2. Tariff Rules
The Tariff Rules for Declaration Policies are as follows:
a) The minimum sum insured shall be Rs. 1 crore.
b) Reduction of sum insured shall not be allowed under any circumstances.

c) Monthly declarations based on the average of the highest value at risk on

each day or highest value on any day of the month shall be submitted by
the insured latest by the last day of the succeeding month. If
declarations are not received within the specified period, the full sum
insured under the policy shall be deemed to have been declared.
d) The basis of value for declaration shall be the Market Value unless
otherwise agreed to between insurers and insured.
e) Refund of premium on adjustment based on the declarations /

cancellations shall not exceed 50% of the total premium. (This is the
minimum premium retention under the policy).
f) It is not permissible to issue Declaration policy in respect of:
i. Insurance required for a short period.

ii. Stocks undergoing process.
iii. Stocks at Railway sidings.
3. Advantages of Declaration policies
The advantages of declaration policies are:
a) The premium ultimately payable is limited to the actual amount at risk

irrespective of the sum insured.
b) Irrespective of the premium eventually paid on expiry of the policy, the

liability under the policy remains up to the sum insured at all times
during the currency of the policy.
c) The provision for adjustment of premium is an incentive to the insured

to take coverage for the maximum amount at risk that may be
anticipated by him.
Test Yourself 3
What shall be the minimum sum insured for Declaration Policies?
I. Rs. 10 lakhs
II. Rs. 50 lakhs
III. Rs. 1 crore
IV. Rs. 10 crore

CHAPTER 2 FLOATER POLICIES
D. Floater Policies
1. Floater policy
Floater Clause in Fire policies (also known as Floater Policies) is granted to

cover stocks which fluctuate between different locations under a single Sum
Insured in a single policy.
The stocks may be stored in different godowns at different locations in the

same town, city, state or other states as well. At any point of time, the insured
may not be able to furnish separate value of stocks in each godown but is able
to provide total value at risk at all locations.
A floating policy covers stocks at various locations (process blocks, godowns and
/ or in open) under one sum insured.
The premium charged is at the highest rate applicable to insured’s property at

one location subject to 10% loading. In case stocks in a process block are
covered under the Floating Policy and the rate for the process block is higher
than the storage rate, the process rate subject to 10% loading shall apply.
The Tariff provides that presence of “Kutcha” construction may be ignored for
rating purposes.
The following Floater clause is attached to the fire policy.
"In consideration of Floater extra charged over and above the policy rate the
Sum Insured in aggregate under the policy is available for any one, more, or all
locations as specified in respect of movable property.
At all times during the currency of this policy the insured should have a good
internal audit and accounting procedure under which the total amount at risk
and the locations can be established at any particular time if required.
The changes in the address of locations specifically declared at inception should

be communicated."
2. Floater Declaration Policies
The Tariff allows the issue of Floater Declaration Policies subject to a minimum
sum insured of Rs. 2 crores and compliance with the Rules for Declaration
policies except that the minimum retention shall be 80% of the annual premium.

SPECIAL CLAUSES CHAPTER 2
Test Yourself 4
Which of the following policies are granted to cover under a single policy, stocks
which fluctuate between different locations?
I. Declaration policy
II. Floater policy
III. Local Authority policy
IV. RIV policy
E. Special Clauses
Some of the clauses for special purposes commonly used in fire insurance are
now examined. The insurers may modify the clauses according to specific
requirement.
1. Agreed Bank Clause
All policies in which a Bank/ Financial Institution has interest shall be issued in
the name of Bank/ Financial Institution and Owner or Mortgagor and shall
contain a suitable clause to protect their mutual interest.
The clause provides:
a) That upon any money becoming payable under this policy the same shall
be paid by the Company to the Bank and such part of any money so paid
as may relate to the interests of other parties insured shall be received
by the Bank as Agents for such other parties.
b) That the receipts of the Bank shall be complete discharge of the

Company there for and shall be binding on all the parties insured
hereunder.
Note: The Bank shall mean the first named Financial Institution / Bank
named in the policy.
c) That if and whenever any notice shall be required to be given or other

communication shall be required to be made by the Company to the
insured or any of them in any manner arising under or in connection with
this policy, such notice or other communication shall be deemed to have
been sufficiently given or made, if given or made to the Bank.
d) That any adjustment, settlement, compromise or reference to

arbitration in connection with any dispute between the Company and the
insured or any of them under this policy if made by the Bank shall be
valid and binding on all parties insured but not so as to impair rights of
the Bank to recover the full amount of any claim it may have on other
parties insured hereunder.

CHAPTER 2 SPECIAL CLAUSES
e) That this insurance so far only as it relates to the interest of the Bank
therein, shall not cease to attach to any of the insured property by
reason of operation of condition 3 of the Policy. Except where a breach
of the condition has been committed by the Bank or its duly authorised
agents or servants, this insurance shall not be invalidated by any act or
omission on the part of any other party insured hereunder, whereby the
risk is increased or by anything being done to or upon any building
hereby insured or any building in which the goods insured under the
policy are stored, without the knowledge of the Bank.
Provided always that the Bank shall notify the Company of any change of
ownership or alterations or increase of hazards not permitted by this
insurance, as soon as the same shall come to its knowledge and shall on
demand pay to the Company necessary additional premium from the
time when such increase of risks first took place and
f) The Company shall pay the Bank any sum in respect of loss or damage
under this policy and shall claim that as to the Mortgagor or owner no
liability, therefore, existed, the Company shall become legally
subrogated to all the rights of the Bank to the extent of such payments
but not so as to impair the right of the Bank to recover the full amount
of any claim it may have on such Mortgagor or Owner or any other party
or parties insured or from any securities or funds available.
Note: In cases where the name of any Central Government or State

Government owned and / or sponsored Industrial Financing or
Rehabilitation Financing Corporations and / or Unit Trust of India or
General Insurance Corporation of India and / or its subsidiaries or LIC of
India / any Financial Institution is included in the title of the Fire Policy
as mortgagees, the above Agreed Bank Clause may be incorporated in
the Policy substituting the name of such institution in place of the word
“Bank” in the said clause.
2. Contract Price Insurance Clause
In the case of insurance of imported goods only (and not for goods of local
manufacture) which are sold under a contract which is cancelled either wholly
or to the extent of loss or damage, it is permissible to issue a policy on the basis
of Contract Price and the following clause shall be inserted in the Policy.
“It is hereby agreed and declared that in respect only of goods sold but not
delivered for which the insured is responsible and with regard to which under
the conditions of sale, the sale contract is by reason of the perils covered under
the Policy, cancelled either wholly or to the extent of the loss or damage, the
liability of the company shall be based on the contract price and for the
purpose of average the value of all goods to which the clause would in the event
of loss or damage be applicable shall be ascertained on the same basis.”

SPECIAL CLAUSES CHAPTER 2
3. Designation of Property Clause
a) For the purpose of determining, where necessary, the item under which
any property is insured, the insurers agree to accept the designation
under which the property has been entered in the insured’s books.
b) The practice varies among the insured’s as regards classification of items

of property in their books of account. For example, a compound wall
may be treated as part of plant value or an air-conditioner may be
classified as machinery and not electrical machinery.
In the event of a loss, the Surveyor will have to consider under which item of
property covered the loss falls.
The clause clarifies the position in order to avoid any disputes on the issue.
Test Yourself 5
For which of the following goods, can a policy on the basis of Contract Price be
issued?
I. Goods of local manufacturers

II. Goods in work in progress in industries
III. Imported goods
IV. FMCG

CHAPTER 2 SUMMARY
Summary
a) Add on covers are extensions of the fire policy on payment of additional

premium and granted by attachment of endorsements.
b) Combustion due to Fire only is the additional cover that is provided in

respect of fire damage only, as a result of spontaneous combustion.
c) Earthquake (Fire and/or Shock) is the additional cover which is available for
Earthquake Fire Only or Earthquake (Fire and Shock both).
d) The forest fire extension includes loss of or damage to the property insured
directly caused by burning of forest, jungles and clearing of lands by fire.
e) Impact damage due to Insured’s own Vehicles and the articles dropped from
them is the extension that covers loss by direct impact to insured’s property
caused by insured’s own power driven vehicles, forklifts, cranes, etc.
f) Deterioration of Stocks in Cold Storage premises due to accidental power

failure consequent to damage at the premises of Power station due to an
insured peril is the extension that covers damage to the property insured
caused by change of temperature.
g) Architects Fees Add on permits expenses up to 7.5% of admitted loss towards

fees in connection with superintendence of the reinstatement for building,
machinery, accessories and equipment.
h) The Debris removal extension endorsement provides cover for Debris

Removal up to 10.00%.
i) Omission to insure, Additions, Alterations or Extensions Clause is applicable

to all new buildings, Machinery, plant and other contents declared, which
the insured may erect or acquire.
j) The Spoilage Material Damage extension covers material damage by perils

causing spoilage same as in fire policy.
k) Leakage and Contamination cover is for physical loss by leakage by its

container due to accidental leakage and all accidental contaminations by
contact with foreign matters.
l) Insurance of Additional Expenses of Rent for An Alternative Accommodation

extension is for non manufacturing premises only under material damage.
m) Start up Expenses extension covers start up costs necessarily and reasonably

incurred consequent upon loss or damage.

SUMMARY CHAPTER 2
n) Escalation clause provides an automatic increase in sum insured from the

day of inception of cover.
o) The reinstatement value policy provides a basis of fixing sum insured on the
fire policy form with a Reinstatement Value memorandum incorporated
therein.
p) Reinstatement Value Policy may be extended to cover additional cost of

reinstatement incurred by the insured to comply with regulations enforced
by Authorities by incorporating the Local Authorities clause in the policy.
q) A declaration policy is a fire policy with a Declaration clause attached to it.

The insured can fix a ‘provisional sum insured’ which represents the highest
value of stocks at any point of time during the policy period.
r) Floating policies are granted to cover under a single policy stocks which
fluctuate between different locations.
s) Some of the clauses for special purposes commonly used in fire insurance
which can be modified according to specific requirements are
i. Agreed bank clause

ii. Contract price insurance clause
iii. Designation of property clause

Answer 1
Leakage and Contamination clause provides cover for accidental leakage and
contamination of oils and chemicals.
Answer 2

Authorities by incorporating the Local Authorities clause in the policy.
Answer 3
The minimum sum insured for Declaration Policies shall be Rs. 1 crore.
Answer 4
Floater policies are granted to cover under a single policy, stocks which
fluctuate between different locations.
Answer 5
A policy on the basis of Contract Price can be issued only for imported goods.

Question 1
Which of the following policy clause extends cover to material damage by perils
causing spoilage to loss of stock in process?
I. Temporary removal of stocks clause

II. Debris Removal clause
III. Spoilage Material Damage clause
IV. Leakage and Contamination clause
Question 2
In which of the following cases, the declaration policy cannot be issued?
I. Insurance required for short period

II. Stocks undergoing process
III. Stocks at railway sidings
IV. All of the above
Question 3
Which of the following policies shall be issued for stocks which are subject to
frequent fluctuations in value, or in quantity?
I. Family floater policy

II. Declaration policy
III. Local Authority policy
IV. Agreed bank policy
Answer 1
Spoilage material Damage Clause extends cover to material damage by perils

causing spoilage to loss of stock in process.
Answer 2
Declaration policy cannot be issued in respect of: Insurance required for a short
period, Stocks undergoing process and Stocks at Railway sidings.

Answer 3
Declaration policy can be issued for stocks which are subject to frequent
fluctuations in value, or in quantity.

CHAPTER 3
FIRE HAZARDS AND FIRE PREVENTION
The term “Fire Hazards” refers to not only the causes of fires but also those
circumstances which increase the probability of fires occurring, or which enable
fires to spread and increase the loss.
In this chapter we will study about the different types of fire hazards and
classification of fire load. We will also discuss about the components of the
structure that is used for evaluating for fire resistance. Towards the end of the
chapter we will study about fire prevention.
Learning Outcomes
A. Fire Hazards
B. Fire Load
C. Fire Resistance
D. Fire Prevention

CHAPTER 3 FIRE HAZARDS
A. Fire Hazards
Fire Hazards
The system of fire insurance rating is based on classification of risks, which in

turn is based on assessment of fire hazards and loss experience in each class.
Definition
The term “Fire Hazards” refers to not only the causes of fires (sometimes called
originating or inception risk) but also those circumstances which increase the
probability of a fire occurring, or which enable fires to spread and increase the
loss (contributory risk). Often, the contributory risk is more important than the
originating risk.
Example
A lighted match accidentally fell upon and ignited a heap of waste rags and
shavings which in turn ignited a timber partition against which the waste was
stacked and the fire spread by way of inflammable materials over the whole
floor and, via open wood stairs, to other floors until the whole of the building
was engulfed in fire.
If the originating cause is smoking it normally may cause a negligible loss but
the features which spread the fire, i.e. timber partition, the inflammable
stocks, and the open stairs have increased the loss to a substantial figure. These
features are contributory factors. Therefore, fire prevention is directed not only
at preventing the origin of fires but also at preventing their spreading.
The different types of fire hazards that can result in losses are:
Diagram 1: Types of fire hazards

FIRE HAZARDS CHAPTER 3
Besides originating and contributory factors there are other hazards which
result in further losses. Some examples are:
i. Collapse of intermediate floors, roof and walls

ii. Breakage and spoilage of materials, plant, machinery etc. and
iii. Spoilage through smoke, heat and water.
1. Originating Hazards
The following is a list of common causes arranged in order of their frequency of

occurrence.
a) Electrical
This is the leading cause of industrial fires.
i. Firstly, there is the danger that sparks will be produced during the
normal working of the electrical equipment and
ii. Secondly, a faulty condition of equipment may produce overheating or
sparking.
The first hazard can be reduced by the careful selection of equipment. The
second hazard can be minimised by the use of good quality of equipment
and materials and a high standard of workmanship in the installation.
Frequent inspection and maintenance must, of course, follow installation.
Special attention is needed for equipment in areas where hazardous

processes are carried on and in storage areas.
b) Smoking
This is a potential cause of fire almost everywhere. Discipline, control and

education of employees will minimise this hazard to a considerable extent.
c) Friction
Friction due to hot bearings, misaligned machine parts, poor adjustment of

power drives and conveyors etc. leads to many industrial fires. A regular
schedule of inspections, maintenance and proper and adequate lubrication
would reduce this hazard considerably.
d) Overheated Materials
The hazard arises due to abnormal process temperatures, especially those

involving heated flammable liquids and materials in driers. These hazards
can be prevented by careful supervision and competent operators,
supplemented by well maintained temperature controls.

CHAPTER 3 FIRE HAZARDS
e) Hot Surfaces
The hazard from due to heat from boilers, furnaces, electric lamps, hot-
process metal igniting flammable liquids and ordinary combustibles. This
can be prevented by safe design, providing ample clearances, insulation and
air circulation between hot surfaces and combustibles.
f) Burner Flames
Improper use of portable torches, driers, portable heating units and gas or
oil burner flames is a common source of hazard. These hazards could be
prevented by proper design, operation and maintenance.
g) Combustion Sparks
Sparks and embers released from incinerators, foundry furnaces, various

process equipment, etc. pose fire hazard. Use of well-designed equipment
and well enclosed combustion chambers with spark arrestors reduce the
hazard.
h) Spontaneous Combustion
This hazard exists in oily waste and rubbish, deposits in driers, and industrial
wastes. This can be prevented by good housekeeping and proper process
operation. (Note: This is dealt with in detail later)
i) Cutting and Welding
Many fires are caused, during cutting and welding, by sparks or molten
metal falling on combustible materials or by directly igniting from the blow
pipe. Fires also arise from faulty or badly maintained fittings on gas
cylinders or incorrectly connected electric welding equipment. This hazard
can be prevented by use of the hot work permit system and other recognised
precautions.
j) Incendiarism
These are the fires maliciously set by intruders, disgruntled employees and
arsonists. These can be prevented by an alert watch and guard service,
installing fences and other security measures.
k) Mechanical Sparks
Many fires originate due to sparks from foreign metal in machines,

particularly in cotton mills, and in grinding and crushing operations. The
hazard can be reduced by keeping stock clean and by removing foreign
material by magnetic or other separators.

FIRE HAZARDS CHAPTER 3
l) Molten Substances
Fires are caused by metal escaping from ruptured furnaces or spilled during
handling. These fires can be prevented by proper material handling.
m) Chemical Action
Fires can also originate by chemical processes going out of control,

chemicals reacting with other materials and decomposition of unstable
chemicals. These fires can be prevented by proper operation,
instrumentation and control, and by careful handling and storage.
n) Static Sparks
Static electricity is rarely recorded as a source of ignition but it is known

that sparks from static electricity can ignite flammable vapours, gases and
dusts. The hazard can be prevented by grounding, bonding and
humidification.
o) Lightning
Fires have been known to originate from direct lightning strike and sparks
from one object to another induced nearby lightning strike. These may be
prevented by lightning rods, arrestors and grounding.
2. Contributory Hazards
These hazards increase the probability of a fire occurring or which enable or

permit fires, to spread and increase the loss.
a) Construction
The building constructed with much woodwork, having internal wooden

partitions, storied building, building having many floor openings, building of
large size without internal compartments, etc. involve contributory hazards.
b) Exposure
Exposure to other buildings in hazardous occupation, location in

conflagration area etc.
c) Absence of people to raise the alarm in case of fire.
d) Locked or inaccessible premises or isolated premises.

CHAPTER 3 FIRE LOAD
3. Hazards arising from Construction
Before considering these hazards, the concepts of fire load and fire resistance
of building need be examined and assessed to prevent the hazards are briefly
examined.
Test Yourself 1
Which of the following is an example of contributory hazards?
I. Electrical
II. Smoking
III. Construction
IV. Friction
B. Fire Load
Definition
Fire load is defined as the quantity of heat liberated, per unit of floor area,
when a building and its contents are completely burnt.
There is a mathematical formula for calculating fire load.
The nature of the combustible materials must be known, so that the calorific
values per kilogram of such materials can be obtained from calorific value
tables. The weights of the combustible materials are multiplied by their
respective calorific values. The products so arrived are added and the result is
divided by the floor area to arrive at fire load.
Experts have recognised three main classes of occupancies, on the basis of fire
load. This also conforms to the relevant Indian Standard Specification.
a) Low fire load: Generally, residential premises, offices, hotels, etc.

b) Moderate fire load: Generally retail shops and factory buildings.
c) High fire load: Generally bulk storage godowns and warehouses.
Besides the classifications of occupancies mentioned above there are features

to be considered besides the mere calorific value of combustible materials.

FIRE RESISTANCE CHAPTER 3
Example
a) Celluloid Material Ease of ignition

b) Wood shavings - Rate of burning
c) Oxidising agents - Catalyze other materials to burn Sulphur - Hindrance to
fire-fighters due to emission of obnoxious fumes of hydrogen sulphide
When the amount of heat that a building has to cope with is established, it
becomes necessary to decide what type of building construction is adequate for
the particular fire load. Thus, it is important to know the fire resistance of
individual materials and elements of structure, from the point of view of spread
of fire.
Test Yourself 2
load. Which of the following will be classified under “low fire load”?
I. Residential premises
II. Retail shops
III. Factory buildings
IV. Warehouses
C. Fire Resistance
Definition
The term “fire resistance” gives the time span during which a construction
offers resistance to a standard fire.
Definition
The term “fire resistance” denotes the capacity of an element to withstand

heating of specific severity (standard fire), while performing its normal
functions, thus restricting, the spread of fire in a building for a definite time.
Accordingly in case of building of low fire load, a fire resistance of one hour in
the elements of structure would enable the building to withstand a complete
burnout without collapse. For buildings with moderate and high fire loads, two
and four hours respectively.

CHAPTER 3 FIRE RESISTANCE
The National Fire Code of India has classified the fire resistance of buildings as
under:
Class I 4 hours fire resistance

Class II 3 hours fire resistance
Class III 2 hours fire resistance
Class IV 1 hours fire resistance
The above basis of classification of buildings is, beyond doubt, technically

correct. However, in practice, it is found that different structural elements
have different degrees of fire resistance and besides, buildings are constructed
not because of their fire resistance qualities, but for functional reasons.
For this reason, conventional methods of construction are adopted and building
materials which are easily available in the country are used for construction.
This all the more makes it necessary to evaluate fire resistance of components
of the structure used.
To evaluate fire resistance, the different components of structure that are

evaluated are as follows:
1. Constructional hazards
2. Exposure hazards
3. Height
4. Size
5. Silent risk
6. Hazards arising from goods
7. Miscellaneous hazards
1. Construction hazards
While considering the hazards of construction, the components of the structure

which are considered are mainly those comprising the exterior or shell of the
building, i.e. external walls and the roof of building.
a) External Walls and Hazards associated with them
External wall is a principal wall of a building and includes walls facing into
an open area or other buildings. Construction of the external walls is
important because better the type of construction, the less the building,
would be subjected to exposure hazard.

The different types of external walls and hazards associated with them are:
i. Brick-work / Stone Masonry
Although a brick or masonry wall will not burn, it may be seriously affected
by the tremendous amount of mechanical and heat stresses which develop
during a fire.
ii. Concrete or reinforced cement concrete
These walls have better fire resistance than brickwork or masonry.
iii. Timber
Where the walls are constructed entirely of timber, it is clear that a serious
fire hazard exists, as all timber is combustible and an effective fire-proofing
medium has not yet been discovered for it.
iv. Corrugated Iron Sheeting
This structural element is, of course, incombustible, but owing to its lack of
strength, it soon expands under the influence of heat sufficiently to tear
itself away from its fixing, while, if water is applied to it when red hot, it
crumples.
v. Asbestos Cement Sheeting
They are incombustible but have little mechanical strength, are brittle and
disintegrate easily, sometimes with explosive violence, under the effects of
fire and water. However, corrugated sheets are stronger than flat sheets.
vi. Glass
Buildings having sides of glass are susceptible to considerable exposure

hazard. Besides, fire-fighting operations would be considerably impeded
with fragments of glass showering down on the fire-fighting personnel.
b) Roof
The roof of a building is normally provided as a weather protection against

sun, rain and other elements of nature. In the case of an outbreak of fire,
the construction of the roof plays an important part not only in so far as it
either aids or impedes the spread of fire, but the strength of the roof and its
fire resistance also determines the extent to which the fire-fighters can
carry on the fire-fighting operations from within the building.

If the roof is of a type which is liable to collapse in a fire of a moderate

intensity, even small fires would have to be fought from outside the
structure.
However, a material which is inadequate in strength for a wall may be

adequate in strength for a roof as the functions of these parts of buildings
are very different. A wall has to support the building, or contribute a large
share towards it, and so, an appreciable degree of stability, strength and
fire resistance is expected, whereas a roof has little to support but itself
and relatively less fire resistance is expected.
The main types of the roofing materials are considered below:
i. Thatch
A thatched roof, consisting of successive layers of reeds or straw, is the

most hazardous roof from a fire viewpoint. It is easily ignited even by
sparks, especially in dry weather. Once alight the fire spreads rapidly and is
difficult to extinguish.
ii. Timber Shingles
Serious conflagrations have occurred due to flying brands from shingle-

roofed houses igniting similar roofs over a wide area.
iii. Tarred or bituminous felt
Tarred or bituminous felt laid on wood is easily ignited and burns freely.
iv. Glass Roofs
These types of roofs are very fragile and offer little resistance to fire.
After considering the two main components of construction, viz., external

walls and roofs, it is necessary to consider the hazards associated with the
internal construction.
c) Internal Construction
i. Floors
Intermediate floors are provided in a building in order to increase its usable

area. The floors, therefore, support the machinery and equipment at
different levels and the fire-resistance of the floors will determine how
much damage could be caused to the machinery and equipment installed
thereon and on floors below. Floors which are unable to withstand fires of a
reasonable intensity are liable to collapse, thereby causing severe damage
to equipment which may not have been at all affected by the fire.

Apart from the damage to the equipment, the collapse of the floor may also
cause damage to the walls supporting the floors, as a collapsing floor tends
to pull down all or a part of the supporting walls.
In judging the merits or demerits of floors, there are two main

considerations:
 the materials employed in construction and

 the existence of floor openings
It is highly desirable that floors be constructed entirely of incombustible

materials.
ii. Floor Openings
Fire tends to spread vertically more than horizontally, and unprotected floor
openings allow flame and smoke to be carried upward from floor to floor;
and burning embers to fall to the floor below, thus spreading the fire
throughout the building. They allow water used in extinguishing a fire on an
upper floor to pour on lower floors, adding to the loss directly caused by the
fire.
An ideal arrangement would be to have no floor openings, access to the

various floors being obtained by hoists and staircases in the open.
Stairs are also considered as one type of floor opening. Unenclosed stairways
allow free passage for fire and smoke and, if constructed of wood, supply
fuel as well.
Hoists and lift shafts present a similar risk.
Belt and rope holes permit fire to spread easily from floor to floor, and if
many exist, the safeguards provided for stairs and hoists may be nullified by
the unprotected holes. It is not always practicable to enclose such holes,
and in that case all that can be done is to reduce the number and size of
such openings to a minimum.
iii. False Ceilings
Any ceiling of combustible material is unsatisfactory, whether it be of wood,

fiberboard, textile fabric or paper, as, in addition to the hazard of the
cavity behind the ceiling, the ceiling itself is easily ignited and provides fuel
for a fire.

iv. Internal Partitions
Partitions can be of great value, if they are constructed of brick or concrete

as they will tend to confine a fire to the portion of the building in which it
has originated, or, at least will prevent it sweeping through the entire
building.
However, these partition walls must be of substantial thickness, extend from

floor to roof and have all openings protected with Fire Proof Doors.
2. Exposure Hazard
Definition
A wide definition of exposure is “the likelihood of a building or its contents

sustaining damage or becoming ignited by reason of a fire in adjoining or
neighbouring premises”.
Exposure hazard arises due to contiguity or closeness of the exposed property

(premises or buildings) to adjoining or neighbouring premises or buildings from
which a fire may spread and/or loss or damage from fire, smoke, heat, water or
breakage may result.
The three main factors in the consideration of exposure hazard are:
 Constructional features
 Distance from other buildings and
 Conditions existing between buildings.
a) Constructional Features
i. Non-standard Construction
All forms of non-standard construction in walls and roofs may pose exposure
hazard: wall openings of any kind, for example, doors and windows are a
source of exposure and facilitate the spread of fire from one building to
another.
ii. Unsatisfactory party walls
A party wall is a good, strong wall, built of specified incombustible materials

of adequate thickness. In practice, walls that go through the roof and 2 ft
above are called Perfect Party Walls; those that go upto the roof are called
Party Walls.
A Perfect Party Wall is a wall of not less than 400 mm thickness. The wall
has preferably to be devoid of all openings. If door openings are essential,
the same should be protected by a fireproof door on either side of the wall.
iii. Areas
These are the small open spaces surrounded by buildings. They may form a
serious hazard. The area acts as a fuel, and a fire raging in one building is
easily transmitted to the others; moreover, a fire may be easily transmitted
via the area from one to other storeys of a building.
b) Distance from other Buildings
i. Adjoining buildings
Where buildings adjoin, and are of the same height, the main risk is of roof
exposure. A perfect party wall extending an adequate distance above the
roof is the best protection against this form of exposure.
ii. Buildings not adjoining
The more fire-resistant the construction, the better the protection of

windows, the less hazardous the occupation, and the less the heights of the
buildings, the closer they can be erected with reasonable safety.
c) Conditions existing between Buildings
Although two buildings stand at a considerable distance apart, it cannot be

assumed that there is no exposure hazard without consideration of the
conditions existing between the buildings.
Example
An engineering workshop may appear to be out of risk of a saw mill, 30 to 40

meters away, but if the whole of the intervening space is used as a timber yard,
a fire in the saw mill might be transmitted via the timber to the Engineering
Workshop.
3. Height
The hazard of height is to be distinguished from that of size.
A single storey building having ground floor only is known as a shed structure
and a storied building is inferior to a shed structure from hazards point of view
because of the following reasons:
a) The fire on a lower floor tends to spread more easily and rapidly
upwards. A fire in the ground storey therefore tends to involve the whole
building very rapidly by spreading to the upper storeys. The presence of
floor openings giving rise to flue effect is apt to accelerate this
tendency. (As also would combustible floors). Even if the flames do not
penetrate to the upper floors, there is the possibility of smoke damage.
b) On the other hand, water used in extinguishing a fire on one of the

upper floors may damage property on lower floors, either by flowing
through floor openings or by percolating through floors.
c) In the event of one of the upper floors being weakened by fire and giving
way, additional weight is thrown on the floor below, which, too, may
collapse with similar results. Moreover, if the floors be of wood, they
add fuel to the fire.
d) Fire-fighting is rendered more difficult, not only because of the

inaccessibility to upper floors, the difficulty of salvaging plant,
machinery and stocks, and the added danger to firemen, but by
reduction in water pressure. The pressure of the water used for
extinguishing purpose drops by 0.1 kg/sq.cm. for every one meter
height. Therefore, windows in storied buildings must preferably be
staggered on different floors and not one over other.
e) Another hazard is that of enhanced exposure risk, especially where the

building has many wall openings. Window openings on successive floors
which are just below each other help spreading fire from one storey to
another.
4. Size
The greater the size of the building, the greater will be the fire hazard. Further
there is more value at risk in a large building than in a small one. Because of
the large size, it is more difficult to locate and fight an outbreak of fire.
5. Silent Risk
A manufacturing risk is deemed to be silent when it is not used for

manufacturing and storage purposes. A lower rate of premium is charged for the
silent period but a warranty is inserted stating that during the currency of the
policy, the said premises are silent and that no part of the machinery is used for
the purpose of manufacture, and that all stocks of whatever nature are
removed from the premises and no part of the premises is used for storage of
any goods or merchandise.
In case of a silent risk, a fire which develops inside will remain unnoticed for a
considerable amount of time since there would be no one around to detect it.
Whereas in the case of a godown risk in a manufacturing concern, detection of
fire will be earlier as there will be always someone or the other present in the
premises.
(Note: The Fire Tariff defines “Kutcha” (inferior) construction as buildings

having walls and/or a roof of wooden planks / thatched leaves and / or grass/
hay of any kind / bamboo / plastic cloth / asphalt cloth / canvas / tarpaulin
and the like.

An additional rate of Rs. 4.00 per millee is charged for such buildings and/ or
their contents. Normal rates apply to buildings (and / or their contents) of any
other construction. Although the hazards arising from construction, exposure
etc. discussed above are not directly relevant to rating purposes under the Fire
Tariff, nevertheless they are important for risk improvement and loss
prevention and reduction, from the point of view of the insured and for overall
underwriting, from the point of view of the insurers.
However, some of the factors discussed are relevant to rating under

Petrochemicals Tariff.)
6. Hazards arising from Goods
The Tariff classifies goods into hazardous and extra-hazardous (A list of these
goods is issued by the TAC. The list is not comprehensive and if any item is
missing, it does not necessarily mean that it can be regarded as non-hazardous.
Also see chapter 4). The classification is generally based on following features.
a) Ease of Ignition
In many instances flash point is a suitable measure of the ease of ignition.

Goods with flash points (closed cup) of less than 90°F (32° C) are classified
as Extra Hazardous and those with flash points (closed cup) not below 90°F
are termed as hazardous.
In the case of certain solids, particularly vegetable fibres and natural and
synthetic yarns, there is a possibility of a severe ignition hazard, and this is
taken into account in the classification of such materials.
Other materials, especially if slightly damp or contaminated with fats and

oils, can ignite spontaneously.
b) Speed and Intensity of burning
The speed and intensity of burning is often dependent on the manner in

which materials are stored. Thus, lightly compacted fibres burn more readily
than when they are firmly compressed. Certain metals, example, Aluminum
present little hazard except when in a finely powdered state.
c) Method of Packing
The method of packing is all important in determining the potential fire

hazard of a material.

Example
Hessian wrappings and sacks are in themselves hazardous and conducive to

rapid spread of fire.
In some instances hazardous goods, if stored in small glass or metal

containers, may be treated as non-hazardous.
d) Explosion
Substances which by their nature or by their method of storage can cause

explosions are included.
e) Contamination
Some materials, particularly, certain organic chemicals, while not in

themselves highly combustible, can evolve excessive amount of smoke and
noxious fumes when involved in a fire, and can lead to the contamination of
goods not actually involved in a fire.
Materials such as coloured dyes and carbon blacks can also present a
contamination hazard.
f) Interaction with other materials
Many oxidizing agents such as dichromate’s, permanganates and some

peroxides are relatively innocuous until they come into contact with
carbonaceous material when rapid oxidation, with the production of heat
and flame, can occur.
g) Toxicity
Toxic substances must often be classed as hazardous for they can hamper
fire-fighting, and if situated alongside or above other materials, example:
foodstuffs, there is always the possibility of contamination.
h) Difficulty of fire extinguishment
The difficulty of extinguishing a fire has to be taken into account when

considering the classification of goods. In general, if the fire cannot be
safely extinguished with water the goods must be deemed hazardous.
Some materials can hamper fire fighting through the evolution of smoke and
fumes. Goods of high calorific value, example- rubber must also be
considered hazardous owing to the fact that fires in such materials burn with
great intensity and may require excessive quantities of water for
extinguishment unless the fire is detected and attacked at a very early
stage.
Acids and corrosive substances in general must also be deemed hazardous as

apart from interaction with other materials they present special problems to
fire fighting personnel.
The degree to which many of these factors play their part, either along or in
combination, together with any fire experience of the commodity, or closely
similar commodity, determines the classification.
7. Spontaneous Combustion
Combustion, that is ignition or visible burning, occurs when heat from an

external source is applied to a substance. But with certain commodities
combustion can occur without heat being supplied externally. In other words,
the commodity, by reason of its own properties, generates heat on its own
(exothermic substance) to bring itself to its ignition point (see also chapter 2).
Spontaneous combustion may occur in these circumstances:
a) Slow Oxidation
Slow oxidation commencing at ordinary temperatures, for example, Oily

waste i.e. rags soaked in oil. Slow oxidation generates heat, and with the
rise in temperature oxidation is accelerated until ignition point is reached
and the waste catches fire. Apart from linseed oil, cotton seed oil, etc. any
vegetable oil in conjunction with textile waste, cotton waste, wool waste
etc. can be cause spontaneous combustion.
Precautions need be taken for provision of metal tins, with well-fitting lids,
for temporary storage and removal from the premises every day.
b) Absorption of Oxygen from the air by porous substance
A classic example is coal, softer and newer the coal the greater the
absorption of oxygen and higher the risk of self-heating.
Some of the precautions to check spontaneous combustion are:
i. Stacks should not be over 10 ft. in height nor

ii. There should not be more than 200 tons in any stack,
iii. Ample ventilation is provided so that heat is dissipated quickly.
c) Action of bacteria leading to oxidation
This happens with hay, grain, hemp, jute, cotton etc. Precautions to check
spontaneous combustion are avoidance of moisture and provision for
ventilation.

8. Miscellaneous Hazards
Apart from hazards arising out of construction, exposure etc., there are hazards
of fire, explosion etc. involved in manufacturing equipment and activities.
Some examples are provided.
Equipment Prevention
Air moving equipment to remove The system should be of an
vapors’, dusts and waste material enclosed nature and properly
designed and maintained
Refuse handling systems e.g., The incinerator should be
incinerator constructed of bricks or masonry
and located in a separate building.
Boilers involve storage of fuel e.g., Appropriate storage arrangements.
Coal, Furnace Oil, Natural Gas.
Industrial furnaces / ovens used to -do-
supply heat required for manufacture
of industrial or consumer goods. These
involve solid fuel, oil or gas.
Finishing process of industrial goods Spray painting segregated in a
using paints, varnishes, enamels etc. separate building etc.
Cleaning processes. Products specially Segregation of process and storage
of metallic construction need some of cleaning agents.
type of cleaning of surface by the use
of flammable solvents e.g. petrol,
benzol etc.
Welding and cutting operations are Gas and electrical welding and gas
involved in metal fabrication cutting operations should be
processes. confined to
separate compartments free of
any combustibles
Grinding processes to reduce to Grinding process should be located
powder form such materials as wheat, in a separate building segregated
sulphur, wood, coal, etc. aluminum, by fire-resistive walls, provision of
magnesium etc. explosion vents and adequate dust
extraction systems.
Test Yourself 3
In which of the following circumstances can spontaneous combustion occur?
I. Non-absorption of oxygen by air

II. Slow oxidisation
III. Provision of ventilation
IV. Avoidance of moisture

FIRE PREVENTION CHAPTER 3
D. Fire Prevention
Fire prevention has been dealt with at appropriate places. Fire prevention has
another dimension viz. loss reduction through fire detection and fire
extinguishment, which together constitute fire protection.
1. Fire Extinguishment Systems
When fire is detected in its early stages, trained personnel can easily extinguish
it using first aid appliances. Automatic fire detection systems can thus help
minimise fire losses. These detectors are actually activated by smoke, radiation
or heat.
The different fire extinguishment systems are as follows.
a) First Aid Appliances
These are portable extinguishers, buckets and internal hose reels designed
for use on fire in the early stage.
b) External Appliances
These are mobile mechanically driven fire engines and trailor pumps and
hydrant system installed in the compound. Hydrant systems involve the
provision of adequate water supplies along with piping, hoses, nozzles etc by
means of which water can be brought to the site of fire.
c) Sprinkler Installation
This is a device designed for automatic detection and extinguishment of a

fire by the use of water in its initial stages. Its operation simultaneously
causes an alarm bell to sound.
d) Special Extinguishment systems
Automatic medium and high velocity water spray systems, are used to
protect special hazards.
Example
For extinguishing fire in open tanks of certain high flashing flammable

liquids and for protecting storage tanks containing low flashing hazardous
liquids or gases against heat from an exposure fire.

CHAPTER 3 FIRE PREVENTION
e) Carbon dioxide extinguishers
These are used chiefly for fires in electrical equipment or flammable liquids
and are not suitable for fire in ordinary combustibles.
f) Dry chemical extinguishers
These are recommended for flammable liquid and electrical fires (but
excluding delicate electrical equipment such as telephone switch boards,
computers, etc.)
g) Foam systems
These are recommended for fires in flammable liquids of the oil and gasoline
types. They are not suitable for fires in ordinary combustibles or in
electrical equipments.
h) Mutual Aid Scheme
These operate where there are 2 or more industrial plants, warehouses and
public utilities. These units use their resources to help each other when fire
occurs in one of the members’ premises.
2. Good Housekeeping
The term embraces all measures taken by a progressive management to

promote efficiency and foster safety at the work place. Good housekeeping
depends upon the culture of the organisation and is derived from the positive
attitude of top management.
Generally speaking, the indications of good housekeeping are:
a) Clean, neat and tidy appearance of premises.
b) Good lay-out for storage, movement of raw materials, packing materials,

finished products and location of machinery.
c) Regular maintenance of building, electrical installation, plant and

machinery and fire extinguishing appliances etc.
d) Segregation of hazardous processes and hazardous goods.
e) Separate storage of oils, paints, and petrol

FIRE PREVENTION CHAPTER 3
3. Bad Housekeeping
Some of the features of bad housekeeping are:
a) Failure to maintain a high standard of order and cleanliness.
b) The presence of defective windows, trap doors, and the like.
c) Neglect of situations where litter or trade waste can accumulate and

into which cigarette ends, lighted matches or other sources of ignition
can be dropped.
d) Congestion in storage of stocks, plant and machinery, etc. or insufficient

floor space.
Example
Stocks stored in galleries in a Cold Storage Chamber.
e) Failure to provide the appropriate safeguards in the storage and use of

hazardous material.
f) The installation of unsuitable types of heating and lighting

arrangements.
g) Failure to safeguard all supplies of power, lighting and heating when the
premises are left unattended.
h) Fire extinguishing appliances either not provided for or, are insufficient
in number, not properly distributed or maintained.
i) Buildings, boundary walls etc, in a poor state of repair and thus

vulnerable to external fires.
4. Storage of combustible material
The storage of any combustible material in a building constitutes a hazard

because a fire may thereby spread rapidly throughout the storage parts of the
building and perhaps involve the whole, including the parts where expensive
machinery is accommodated. The following features should be observed:
a) Stocks should be so kept (in a building set apart for the purpose) that
they are wholly accessible. Individual stocks and piles should be as small
as possible, with clear spaces and gangways round. Stocks should not be
piled so high as to be beyond easy reach of fire fighters.
b) There should be no accumulation of packing materials, such as straw.

CHAPTER 3 FIRE PREVENTION
c) All packing materials, especially of inflammable nature shall be confined

to a place partitioned by non-combustible material.
d) Heavy machinery should preferably be on the lowest floor to obviate the

risk of it crashing through a fire weakened floor. If it must be on upper
floors they should be adequate to take the weight.
5. Loyal Staff
Safe working conditions, adequate lighting and ventilation, training in safe work
methods and risk awareness, provision of canteen, rest room, first aid and other
amenities will produce a loyal staff willing to accept rules and submit to
discipline.
6. Prohibition of Smoking
Smoking is directly or indirectly the cause of innumerable fires. In workrooms or

factories where combustible waste is made, smoking should be strictly
prohibited in the workroom or factory proper.
It is desirable; however, that smoking should be permitted at certain specified

times (for example, morning and afternoon breaks) in suitable places, such as
mess rooms or canteens. An adequate number of suitable deep receptacles for
matches and cigarette ends should be provided. The total prohibition of
smoking may lead to greater hazards from clandestine smoking.
7. Combustible litter
Factories in which combustible litter is produced, and warehouses in which such

accumulation are likely to be found on the floors, there should be arrangements
for all waste and refuse to be swept up at frequent, regular intervals and
removed to places where it can be kept without endangering anything until it
can be safely disposed of, either by carting or by burning.
In fact, in practically every production risk, floor sweepings, oil waste, rags and
other trade waste should be kept in proper metal receptacles with covers and
the contents thereof be safely deposited outside each night, but preferably
disposed of by burning safely.
Test Yourself 4
_____________ is a device designed for automatic detection and extinguishment

of a fire by the use of water in its initial stages.
I. First Aid Appliances

II. External Appliances
III. Sprinkler Installation
IV. Special Extinguishment Systems

SUMMARY CHAPTER 3
Summary
a) The term “Fire Hazards” refers to not only the causes of fires (sometimes
called originating or inception risk) but also those circumstances which
increase the probability of a fire occurring, or which enable fires to spread
and increase the loss (contributory risk).
b) The different type of fire hazards that can result in losses are
i. Originating hazards
ii. Contributory hazards
iii. Hazards arising from construction
c) Fire load is defined as the quantity of heat liberated, per unit of floor area,
when a building and its contents are completely burnt.
d) Experts have recognised three main classes of occupancies, on the basis of

fire load. This also conforms to the relevant Indian Standard Specification.
i. Low fire load: Generally, residential premises, offices, hotels, etc.

ii. Moderate fire load: Generally retail shops and factory buildings.
iii. High fire load: Generally bulk storage godowns and warehouses
e) The term “fire resistance” denotes the capacity of an element to withstand

heating of specific severity (standard fire), while performing its normal
functions, thus restricting, the spread of fire in a building for a definite
time.
f) To evaluate fire resistance the different components of structure that are

evaluated are as follows:
i. Constructional hazards
ii. Exposure hazards
iii. Height
iv. Size
v. Silent risk
vi. Hazards arising from goods
vii. Miscellaneous hazards
g) Exposure hazard arises due to contiguity or closeness of the exposed

property (premises or buildings) to adjoining or neighbouring premises or
buildings from which a fire may spread and/or loss or damage from fire,
smoke, heat, water or breakage may result.

CHAPTER 3 SUMMARY
h) The three main factors in the consideration of exposure hazard are:
i. Constructional features
ii. Distance from other buildings and
iii. Conditions existing between buildings.
i) A single storey building having ground floor only is known as a shed structure
and a storied building is inferior to a shed structure from hazards point of
view.
j) The greater the size of the building, the greater will be the fire hazard.
Further there is more value at risk in a large building than in a small one.
Because of the large size, it is more difficult to locate and fight an outbreak
of fire.
k) A manufacturing risk is deemed to be silent when it is not used for

manufacturing and storage purposes. A lower rate of premium is charged for
the silent period.
l) In case of hazards arising from goods, goods are classified into hazardous
and extra-hazardous based on following features:
i. Ease of ignition
ii. Speed and intensity of burning
iii. Method of packing
iv. Explosion
v. Contamination
vi. Interaction with other materials
vii. Toxicity
viii. Difficulty of fire extinguishment
m) Combustion that can occur without heat being supplied externally is

referred as Spontaneous combustion. Spontaneous combustion may occur in
these circumstances:
i. Slow oxidation
ii. Absorption of Oxygen from the air by porous substance
iii. Action of bacteria leading to oxidation
n) When fire is detected in its early stages, trained personnel can easily
extinguish it using first aid appliances. Automatic fire detection systems can
thus help minimise fire losses. These detectors are activated by smoke,
radiation or heat.

SUMMARY CHAPTER 3
o) The term “Good Housekeeping” embraces all measures taken by a

progressive management to promote efficiency and foster safety at the work
place. Good housekeeping depends upon the culture of the organisation and
is derived from the positive attitude of top management.

Answer 1
Construction is an example of contributory hazards.
Answer 2
Residential premises are classified under low fire load.
Answer 3
Slow oxidation generates heat, and with the rise in temperature, oxidation is
accelerated until ignition point is reached and the waste catches fire. Hence
slow oxidation can lead to spontaneous combustion.
Answer 4
Sprinkler Installation is a device designed for automatic detection and

extinguishment of a fire by the use of water in its initial stages.

Question 1
load. Which of the following will be classified under “High Fire load”?
I. Residential premises
II. Retail shops
III. Factory buildings
IV. Warehouses
Question 2
_____________ are portable extinguishers, buckets and internal hose reels

designed for use on fire in the early stage.
I. First Aid Appliances

II. External Appliances
III. Sprinkler Installation
IV. Special extinguishment systems
Question 3
Which of the following is an example of bad housekeeping?
I. Segregation of hazardous processes and hazardous goods

II. Separate storage of oils, paints, and petrol
III. Regular maintenance of building, electrical installation, plant and
machinery and fire extinguishing appliances
IV. The presence of defective windows, trap doors
Answer 1
Warehouses are classified under high fire load.
Answer 2
First Aid Appliances are portable extinguishers, buckets and internal hose reels
designed for use on fire in the early stage.

Answer 3
The presence of defective windows, trap doors etc is an example of bad

housekeeping.

CHAPTER 4
ERSTWHILE TARIFF – RULES AND RATING
The general rules and regulations prescribed in Section 1 of the erstwhile All
India Fire Tariff are applicable to all sections of the Tariff. These rules are now
observed by insurers as ‘good practice’.
In this chapter we will study about these general rules and regulations
prescribed for policies. We will also study about principles of fire insurance
premium rating and rates prescribed for different risks such as simple risk,
manufacturing risk, utilities, storage risks and tank / gas holders.
Learning Outcomes
A. Policy
B. Fire insurance premium rating

CHAPTER 4 POLICY
A. Policy
The general rules and regulations prescribed in Section 1 of the erstwhile tariff
are applicable to all sections of the Tariff. These rules are now observed by
insurers as ‘good practice’.
Note: Rates and discounts provided in this Chapter are for illustrative purpose
only and Insurers are free to apply rates in compliance to File and Use
Guidelines.
1. Policy
Only Standard Fire and Special Perils Policy (as per wording shown in Section II)
with the permitted “Add-on” covers (Section VIII) if any, can be issued.
a) Policies should be read together with the proposal form, schedule,

specification, endorsements, warranties and clauses for which suitable
formats may be devised by insurers.
b) Policies covering buildings and / or contents shall show block wise

separate amounts on:
i. Building
ii. Machinery and Accessories
iii. Stock and Stock-in-Process
iv. Furniture and other contents
c) The policy has an option to exclude RSMD and / or STFI perils since
inception.
d) The Provisional rate of INR 2.50 per millee for rates not given in
guidelines
2. Type of policies
a) Valued Policies
These policies are issued only for items for which market value cannot be
ascertained.
b) Long-term policies
These policies are issued for 36 months or more for house/ flat owners

POLICY CHAPTER 4
3. Partial Insurance
a) It is not permissible to issue a policy
i. Covering certain portions only of a building. However, plinth and

foundations or the foundation only of a building may be excluded.
ii. Covering only specified machinery (except Boilers), parts of machine or

accessories thereof housed in the same block / building.
b) It is permissible for each owner to insure separately
It is permissible for each owner to insure separately where portions of a

building and / or machinery therein are in different ownership, but to the full
extent of his interest which shall be clearly defined in the policy.
4. Short Period Rates
Policies for a period of less than 12 months must be issued at the Short Period
scale of rates set out hereunder:
For a period not exceeding 15 days 10% of the annual rate

For a period not exceeding 1 month 15% of the annual rate
For a period not exceeding 2 months 30% of the annual rate
For a period exceeding 9 months The full annual rate
Note: Extension of short period policies is not permitted.
5. Cancellation of Policies
a) If insurance is cancelled at the option of
i. The Insured: Retention of premium shall be at short period scale.

ii. The Insurer: Refund of premium shall be on pro-rata basis.
b) Pro-rata refund of premium may be allowed if a policy is cancelled
i. On account of a Government order, or

ii. On completion of a “Building in course of construction, or
iii. Where building is demolished

CHAPTER 4 POLICY
6. Mid-Term Cover
a) Generally, it is not permissible to grant mid-term cover for STFI and /

or RSMTD perils. However, where such covers are granted mid-term, the
following provisions shall apply:
i. Insurers must receive specific advice from the insured accompanied by

payment of additional premium in cash or by a demand draft.
ii. The cover shall be granted for the entire property under one or more
policies.
iii. Cover shall commence 15 days after the receipt of premium.
iv. Premium rates shall be charged on short period scale on full sum insured
for the balance period i.e., up to the expiry of the policy.
b) Mid-term increase in sum insured is allowed on pro-rata basis, while

decrease in Sum insured is permitted on short period basis.
c) The rules relating to rating and discounts are as follows:
Additional rate of Rs.4.00 % shall be charged for building(s) (and/ or

contents thereof) having walls and/ or roofs of wooden planks/ thatched
leaves and/ or grass/ hay of any kind/ bamboo/ plastic cloth/ asphalt cloth/
canvas/ tarpaulin and the like. (This is considered to be “Kutcha”
construction).
d) Risks in Multiple Occupancy Industrial Estates shall be rated “Per Se”.
Definition
“Per Se” rating means each risk will be charged as its own merits at applicable
rate of premium.
Example
Agarbatti manufacturing (rate Rs. 2.00),

Envelope and Paper bag manufacturing example (rate Rs. 2.50),
Plastic Goods manufacturing (rate Rs. 3.50) and so on.
The highest overall rate is not charged. If the entire building of the
Industrial Estate is insured under one sum insured a rate of Rs.1.50 % shall
be chargeable to “building”.

POLICY CHAPTER 4
e) Rates are provided for factories where no manufacturing / storage

activities are carried out or factories which go silent for 30 days or
more. (Silent risks)
f) Claims experience discount can be granted on the basis of incurred

claims ratio:
i. of all the policies covering the insured’s interest on the principle of one
risk – one rate
ii. of the preceding three policy periods
Discounts (%) Incurred Claims Ratio

1.5 Up to 5%
10 Above 5% and up to 10%
5 Above 10% and up to 15%
Note: This discount is applicable to risks rateable under Sections IV, V, VI

and VII of the Tariff.
g) Fire Extinguishing Appliances discount can be granted, as per scale,

subject to the following:
i. System shall be erected and tested as per the relevant regulations.
ii. Certificate from Professionals/ Professional Agencies confirming the

efficiency of the system and its compliance with the Rules shall be
submitted by the Insured.
iii. The installation shall be maintained in efficient working order at all

times and annual maintenance contract with an external agency shall be
in force.
Type of Installation Discount %

Hand Appliances & Trailer Pumps / Fire Engines 2.5
Hand Appliances & Hydrant System 5
Hand Appliances & Sprinkler/Fixed Water Spray System 7.5
Hand Appliances + Hydrant System & Sprinkler / Fixed Water 10
Spray System
Notes:
i. Absence of Hand Appliances for Storage risks will not prejudice the
applicable discount.
ii. The discounts are not cumulative.

CHAPTER 4 FIRE INSURANCE PREMIUM RATING
h) The computation of the rate shall be in the following sequence:
i. Basic rate
ii. Reduction in rates for deletion of STFI and / or RSMTD perils, if opted
out.
iii. Tariff extra for “Kutcha” construction if applicable. (to be applied on i –

ii)
iv. Discount for claims experience (to be applied on i – ii + iii)
v. Discount for FEA on protected blocks (to be applied on i – ii + iii)
Note: The rules regarding Declaration policies, Floater policies and Floater
Declaration policies have been dealt with in Chapter 2.
Test Yourself 1
Which of the following policies are issued only for items for which market value
cannot be ascertained?
I. Long term policies

II. Mid-term policies
III. Short term policies
IV. Valued policies
B. Fire Insurance Premium Rating
1. Principles of fire insurance premium rating
Fire insurance premium rating is based on certain basic principles.
a) Firstly, the rate of premium must be commensurate with the physical

hazards involved.
b) Secondly, classification of risks, based on hazards evaluation, into

homogeneous groups, is adopted. Each group comprises risks exposed to
more or less, the same degree of exposure.
c) Thirdly, the rate of premium is based on the past loss experience of

each group.
d) Fourthly, the principle of discrimination differentiates individual risks

within a group taking into account favourable and unfavourable features
present. Thus, discounts in the premium are granted.

FIRE INSURANCE PREMIUM RATING CHAPTER 4
Example
For fire extinguishing appliances and extra premium is charged for Kutcha
construction of the building for individual risk though belonging to the same
group.
Risks are classified according to occupancy into principal groups such as

simple non-manufacturing risks, manufacturing risks, godowns and
warehouses etc.
Diagram 1: Classification of risk
In each group, there is sub-division of risks.
Example
Godowns are subdivided into classes depending upon the type of goods stored –
non-hazardous, hazardous, extra hazardous etc.
2. Simple Risks
a) Section III of the Tariff prescribes rates for four types of simple
occupancies. Some examples are:
i. Dwellings, Offices, Colleges, Hospitals, Showrooms where goods are kept

for display and no sales are carried out.
ii. Restaurants, Hotels.
iii. Shops (non-hazardous goods), Laundries, Amusement Parks.
iv. Shops (hazardous goods).
b) The list of hazardous goods is provided in the Tariff.
i. Celluloid Goods.
ii. Coir loose.
iii. Crackers and Fireworks.
iv. Explosives of any kind.

v. Hay/ straw.
vi. Hemp.
vii. Jute loose.
viii. Matches.
ix. Methylated spirit.
x. Nitro Cellulose Plastic.
xi. Oils / Ether / Industrial solvents and other flammable liquids flashing at
and below 32°C (closed cup test) other than in sealed tins or drums.
xii. Paints with inflammable base having flash point below 32°C (closed cup
test) – other than in sealed tins or drums.
xiii. Varnishes having a flash point below 32°C (closed cup test) – other than
in sealed tins or drums.
xiv.Disinfectant liquids and liquid insecticides – other than in sealed tins or
drums.
xv. Vegetable fibres of any kind including Rayon fibre.
Note: In shops rated under “non-hazardous goods”, storage of hazardous

goods not exceeding 5% of the total stock is allowed.
c) The rates are provided separately for “building” and “contents”.
The building rate is applicable to pump-houses, garages, compound walls,

computers including computer system records and ancillary equipment and /
or other utilities.
The specific rules applicable to this Section are:
i. This Stocks belonging to the insured stored in the open area adjacent to
the insured’s premises are held covered.
ii. Incidental operations such as grinding of lenses in optical frame shops,

polishing and/ or varnishing in furniture shops, occasional repairs etc are
permitted.
iii. The presence of hazardous goods (as per the list) in “non-hazardous”
shops, not exceeding 5% of the total value of stock is allowed. (A
warranty to this effect is incorporated in the policy on “non-hazardous”
shops.)
iv. For seasonal storage of crackers during the currency of the policy on
“non-hazardous” shops, a loading of 10% shall be charged on the rates
applicable to contents.
v. The reduction in premium rates for deletion of STFI perils (0.15 per
mille) and / or RSMTD perils (0.10 per mille) at the inception of the
policy may be allowed.

vi. Long Term Policies (minimum period three years) may be issued to
house/ flat owners only. Discount is allowed as per scale prescribed
ranging from 15% (3 year term) to 50% (policy for 10 years and above.
Premium for the full term is payable in advance. Minimum premium Rs.
50/- as per rule no 6 of AIFT is chargeable.
Mid-term increase in sum insured shall be allowed on pro-rata basis. Mid-

term inclusion of perils (discount on pro rata basis on balance period).
No refund is permitted if there has been a claim. Refund for midterm
cancellation of such policy is allowed. If policy is cancelled within three
years of inception of cover, the premium to be retained is worked out on
normal rates without discount. If policy is cancelled after three years,
discount slab shall be reworked for number of years policy was actually
in force. The fraction of a year is to be rounded off to full year. No
compulsory deductible franchise is applicable for individual dwelling
houses.
vii. Dwellings are rateable ‘per se’, if inside a ‘factory’. Long term policies
can be issued by either of the two methods given below:
Method A
Premium is to be charged in full without any discount. The sum insured shall
be increased by 10% of original insured value every year.
Method B
No automatic increase in sum insured is allowed but discounts are applicable

based on term of the policy. The cover is eligible for long term discount at
5% per year (Max. 50%). This may result in under insurance over a period of
time. No discount on Earthquake premium is permitted.
With the advent of bancassurance, long term home insurance is becoming

significant in its own right. Lenders and financial institutions together with
insurance partners are promoting this policy in their mutual interests.
3. Industrial / Manufacturing Risks (Section IV)
a) Rates are provided for about 205 industrial / manufacturing risks

arranged in alphabetical order.
As a matter of interest, a few examples are provided to illustrate how

differential rates are charged based on hazard evaluation and loss
experience.

Rate per
Description of Risk
mille
Brickworks (including refractory’s and fire bricks) 1

Tiny Sector with values at risk not exceeding Rs.10 lacs 1
Engineering Workshops, Forging mills, Foundries, etc. 1.25
Man-made Fibre Manufacturing (using cellulose) 1.25
Man-made Fibre Manufacturing (others) 1.5
Biscuit Factories 1.5
Clock / Watch manufacturing 1.75
Breweries 2
Cement Factories 2
Battery Manufacturing 2.25
Cardboard Box Manufacturing 2.25
Cinema Theatres 2.5
Grease Manufacturing 2.5
Carbon paper / Typewriter Ribbon Manufacturing 2.75
Cigar and Cigarette Manufacturing 2.75
Beedi Factories 3
Cinema Film Production Studios 3
Coir Factories 3.5
Flour Mills 3.5
Oil Extraction 3.75
Paint (other than water based) and Varnish Factories 3.75
Bitumenised Paper and / or Hessian Cloth Manufacturing 4
Pencil Manufacturing 4
Furniture Manufacturing (excluding Saw mill) 4.5
Foam Rubber Manufacturing 4.5
Saw Mills (including Timber Merchants premises where
5.5
sawing is done)
Match Factories 5.5
Turpentine and Rosin distilleries 6.5
Cotton gin and Press Houses 10.5
Exhibitions, Fetes, Mandaps 10.5
Celluloid Goods Manufacturing 15
Nitro-cellulose Manufacturing 15

Note: It will be observed that the rate of premium ranges from Re. 1.00 to
Rs. 15.00 per millee.
b) One risk One rate
The rates under this Section shall be uniformly applicable to the entire
insured property in the same industrial compound i.e., all process areas,
storage areas, utilities, miscellaneous blocks, pipelines, roads, compound
wall, cables, street light etc., within an industrial compound shall be
charged the same rate. This is known as – “One industry – One rate” or “One
risk One rate”.
c) There are specific rules applicable to this Section as explained

below:
Rates provided in the Section are for specific industries. All processes which
are essential and integral to such industries shall carry the same rate.
Example
i. Plastic bottle manufacturing incidental to Aerated water manufacturing

shall carry the rate applicable to “Aerated Water Factories”.
ii. Spray painting incidental to Automobile Manufacturing shall carry the

rate applicable to “Automobile Manufacturing”.
iii. Manufacturing of Acid/ Plastics for internal consumption in Explosive

factories shall be rateable under “Explosive Factories”.
d) If two or more factories are located in the same compound, each

factory may be rated “per se”.
Example
i. Bulk Drug Manufacturing (Rs. 3.00 per millee) and Pharmaceuticals (Rs.
2.25 per millee).
ii. Textile Mill (Rs. 2.25 per millee), Gin and Press (Rs. 10.50 per millee)
and Oil Mill (Rs. 2.00 per millee).
iii. Sugar Mill (Rs. 1.50 per millee) and Distillery (Rs. 2.50 per millee).
iv. Ceramics (Rs. 1.50 per millee) and Chemical manufacturing (Rs. 2.25 per
millee)

Thus, although Bulk Drug manufacturing and Pharmaceuticals are located

within the same compound, the former will attract its own rate Rs. 3.00 per
millee, and the latter, Rs. 2.25 per millee. In other words, higher rate is not
applied to both the risks.
For deletion of STFI and / or RSMTD perils reduction in premium rates is Re.
0.25 per millee and Re. 0.10 per mille respectively.
Dwelling houses located inside the factory compound are rated “per se” that
is, the rate of Re. 0.50 per millee as per Section III will be charged and not
the rate applicable to the factory concerned.
4. Utilities (Section V)
This Section provides rates for utilities located outside the industrial /
manufacturing risks (Stand Alones).
The utilities and rates are as follows:
Rate Per Mille

Description of Risk
Rs.
Analytical / Quality Control Laboratories 2.25
Boiler House 1.5
Dam 1
Effluent / Sewage Treatment Plant 1.5
Electric Sub-Station 1.5
Electric Transmission / Distribution Lines 1.5
Pipe lines (carrying water only) 1
Pipe lines (others) 1.25
Pump House (Water) 1.5
Pump House (Others) 2.5
Roads 1
Water Treatment Plant 1
Wireless Transmitting Stations 1.5

5. Storage Risks (Section VI)
Rates are provided in this Section for different types of goods stored in godowns
/ silos or in the open outside the compound of industrial / manufacturing risks.
a) Classification of goods / materials
For the purpose of differential rating, materials / goods are classified into
three generic categories on the basis of their hazard evaluation.
Having regard to their properties materials / goods are classified into three
generic categories on the basis of their hazard evaluation for the purpose of
differential rating:
i. Category I
 Solids which are moderately or slightly combustible

 Flammable liquids having flash points above 65°C
 Inert and non-combustible gases
 Highly toxic materials
 Waste of non-hazardous materials
Example
Agarbatti (Dhoop) Groundnut oil

All flammable liquids having flash Gunnies (loose)
point 65°C (insecticides)
Arecanuts Dyes of all kinds
Beedi leaves Linseed oil
Beet Sugar Milk powder
Betal Nuts Paper of all kinds in any packing
Camphor Mustard oil
Candles Rubber
Canvas cloth Sandalwood oil
Cocoa beans Saw dust
Coconut oil Spices
Coffee and substitutes Sugar
Coir fibre in pressed bales Waste of Non-hazardous materials
Copra Tea
Castor oil Timber
Cashew nuts Tobacco and its products
Coriander Oil Tyres
Cotton

ii. Category II
 Pyrotechnic materials.
 Flammable liquids having flash point between 32°C and 65°C.
 Moderate Oxidising Agents and Oxygen.
 Materials which evolve combustible gases in contact with water.
 Waste of Category I materials
Example
All flammable liquids having Liquid insecticides / pesticides /

flash point between 32°C and disinfectants having flash point between
65°C (both inclusive) 32°C and 65°C (both inclusive)
Aluminium powder/ dust Liquid insecticides / pesticides /
disinfectants having flash point below 32°C
when stored in sealed tins or drums of in
bottles and / or in jars.
Celluloid Fireworks
Bleaching powder Paints, thinners and varnishes having flash
point between 32°C and 65°C (both
inclusive)
Coir fibre (loose) Paints, thinners and varnishes having flash
point below 32°C when stored in sealed
tins or drums or in bottles and / or in jars.
Crackers Oil of cinnamon
Cinnamon Waste of materials falling under Category I
Clove oil Vinegar
iii. Category III
 Explosives.
 Materials which are self ignitable.
 Flammable liquids having flash point below 32°C.
 Strong Oxidising Agents.
 Combustible gases.
 Waste of Category II and III materials

Example
All flammable liquids having a flash Gun powder

point below 32°C (90°F).
Charcoal Hay in pressed bales
Coal Paints, thinners, varnishes having
flash point below 32°C.
Coke Liquid insecticides / pesticides /
disinfectants having a flash point
below 32°C.
Baggase in bales Liquid Petroleum Gas
Bamboos (split) Saltpetre blasting powder
Dynamite Urea Peroxide
Explosives Waste of materials falling under
Category II and III
b) The rates and warranties are as follows:
Materials Stored in
Godowns / Open
Description of Risk
Silos
Rate per mille Rate per mille
Storage of Non-hazardous goods subject 1.00 2.50
to warranty that goods of Category I, II,
III, Coir waste, Coir fibre, Caddies are
not stored therein.
Storage of Category I Goods subject to 2.50 6.00
warranty that goods listed in of Category
II, III, Coir waste, Coir fibre, Caddies are
not stored therein.
Storage of Goods listed in Category II & 4.50 8.50
III subject to warranty that Coir waste,
Coir fibre, Caddies are not stored in.
Storage of Coir Waste, Coir Fibre, 12.00 17.00
Caddies.
Cold Storage premises. 2.50 -
It will be observed that the rates vary according to the type of goods as per
classification already explained and that higher rates apply if the materials
are stored in the open.
The rates are linked with appropriate warranties.

Example
Insurance of non-hazardous goods at the rate of Re.1 or Rs.2.50 as the case may
be, will be subject to a warranty that goods of category I, II, III, coir waste, coir
fibre, caddies (which carry a higher rate) shall not be stored.
The specific rules applicable to this section are as follows:
i. Rates provided shall also apply to buildings storing materials.
ii. Utilities and miscellaneous blocks shall be rated at Re.1.00 per mille.
iii. The presence of hazardous goods of higher category not exceeding 5% of

the total value of the stock may be allowed i.e., without charging the
higher rate.
iv. Incidental open storage up to 2% of sum insured on stocks can be allowed

when the risk is rated under “materials stored in godown”.
v. Incidental operations such as packing / selecting / assorting / mending /

stitching / battery charging and the like which do not materially alter
the nature of risk are allowed to be carried out in the premises.
6. Tanks / Gas Holders (Section VII)
This section provides representative rates for gas holders and tanks located
outside the compound of industrial/ manufacturing risks, as follows:
Rate per
mille
Gas Holders / Bullets and Storages for liquefied gases (except for 5.00
Nitrogen, Carbon dioxide and inert gases)
Gas Holders / Vessels for Nitrogen, Carbon dioxide and inert gases 2.00
Tanks (liquids flashing at 32°C and below) 3.50
Tanks (others) 2.00
Note: Utilities and miscellaneous blocks to be rated @ 1.00 per mille

Test Yourself 2
Under which of the following sections, rates are provided for different types of
goods stored in godowns or silos or in the open outside the compound of
industrial risks?
I. Industrial manufacturing risks (Section IV)

II. Utilities (Section V)
III. Storage risks (Section VI)
IV. Tank Gas holders (Section VII)

CHAPTER 4 SUMMARY
Summary
a) The general rules and regulations prescribed in Section 1 of the erstwhile

tariff are applicable to all sections of the Tariff. These rules are now
observed by insurers as good practice.
b) Valued policies are issued only for items for which market value cannot be
ascertained.
c) Long-term policies are issued for 36 months or more for house flat owners.
d) Policies for a period of less than 12 months must be issued at the short
period scale of rates.
e) If insurance is cancelled at the option of
i. The insured: Retention of premium shall be at short period scale.
ii. The insurer: Refund of premium shall be on pro-rata basis.
f) Pro-rata refund of premium may be allowed if a policy is cancelled
i. On account of a Government order, or
ii. On completion of a “Building in course of construction, or
iii. Where building is demolished
g) Generally, it is not permissible to grant mid-term cover for STFI and/ or

RSMTD perils. However, where such covers are granted mid-term, the
following provisions shall apply:
i. Insurers must receive specific advice from the insured accompanied by

payment of additional premium in cash or by a demand draft.
ii. The cover shall be granted for the entire property under one or more
policies.
iii. Cover shall commence 15 days after the receipt of premium.
iv. Premium rates shall be charged on short period scale on full sum insured
for the balance period i.e., up to the expiry of the policy.
h) Mid-term increase in sum insured is allowed on pro-rata basis, while

decrease in Sum insured is permitted on short period basis.
i) Risks in Multiple Occupancy Industrial Estate shall be rated “Per Se”.

SUMMARY CHAPTER 4
j) “Per Se” rating means each risk will be charged as its own merits at
applicable rate of premium.
k) Fire insurance premium rating is based on certain basic principles.
i. Firstly, the rate of premium must be commensurate with the physical

hazards involved.
ii. Secondly, classification of risks, based on hazards evaluation, into

homogeneous groups, is adopted. Each group comprises risks exposed to
more or less, the same degree of exposure.
iii. Thirdly, the rate of premium is based on the past loss experience of each
group.
iv. Fourthly, the principle of discrimination differentiates individual risks

within a group taking into account favourable and unfavourable features
present. Thus, discounts in the premium are granted.
l) In Simple risks (Section III), of the Tariff prescribes rates for 4 types of
simple occupancies. Some examples are:
i. Dwellings, Offices, Colleges, Hospitals, Showrooms where goods are kept

for display and no sales are carried out.
ii. Restaurants, Hotels.
iii. Shops (non-hazardous goods), Laundries, Amusement Parks.
iv. Shops (hazardous goods).
m) In Industrial / Manufacturing risks (Section IV) Rates are provided for about
205 industrial / manufacturing risks arranged in alphabetical order. The
rates under this Section shall be uniformly applicable to the entire insured
property in the same industrial compound. This is known as ‘One risk one
rate’.
n) The Utilities (Section V) provides rates for utilities located outside the
industrial/ manufacturing risks (Stand Alones).
o) Rates are provided in Storage risks (Section VI) for different types of goods
stored in godowns / silos or in the open outside the compound of industrial/
manufacturing risks.
p) The Tank / Gas Holders (Section VII) section provides representative rates
for gas holders and tanks located outside the compound of industrial /
manufacturing risks.

Answer 1
Valued policies are issued only for items for which market value cannot be
ascertained.
Answer 2
Under storage risks (Section VI), rates are provided for different types of goods
stored in godowns or silos or in the open outside the compound of industrial
risks.
Question 1
Which of the following policies are issued for 36 months or more for house flat
owners?
I. Long term policies

II. Mid-term policies
III. Short term policies
IV. Valued policies
Question 2
Under which of the following sections, rates are provided for utilities located
outside the industrial / manufacturing risks?
I. Industrial manufacturing risks (Section IV)

II. Utilities (Section V)
III. Storage risks (Section VI)
IV. Tank Gas holders (Section VII)

Question 3
What is meant by “Per Se” rating?
I. “Per Se” rating means cover for each risk shall commence 15 days after the
receipt of premium.
II. “Per Se” rating means premium rates shall be charged on short period scale
on full sum insured for the balance period i.e., up to the expiry of the
policy.
III. “Per Se” rating means cover shall be granted for the entire property under
one or more policies.
IV. “Per Se” rating means each risk will be charged as its own merits at
applicable rate of premium.
Answer 1
Long term policies are issued for 36 months or more for dwellings.
Answer 2
Under utilities (Section V), rates are provided for utilities located outside the
industrial / manufacturing risks.
Answer 3
“Per Se” rating means each risk will be charged as its own merits at applicable
rate of premium.


CHAPTER 5
DOCUMENTS
For obtaining any insurance, the proposer is first required to submit a duly
completed proposal form with the insurance company. The proposal form for
Standard Fire and Special Perils Policy in current use follows a uniform format
as provided in tariff.
In this chapter we will discuss about the contents of the proposal form and
objectives of the risk inspection report. We will also discuss about the
importance of cover note. Towards the end of the chapter we will discuss about
policy drafting and endorsements.
Learning Outcomes
A. Proposal Form
B. Risk Inspection Report
C. Cover Note
D. Policy Drafting

CHAPTER 5 PROPOSAL FORM
A. Proposal form
The proposal form for Standard Fire and Special Perils Policy in current use,
generally speaking, follows a uniform format as provided in tariff.
The following is a summary of the contents of the Fire proposal form.
The Fire Proposal form incorporates a note:
The property proposed for insurance is not covered until the proposal is
accepted and premium paid.
1. Details about proposer
i. Name and address including phone, fax no. and e-mail address.
ii. Business of proposer.
iii. Paid-up capital of the firm.
iv. Name of parties who have insurable interest including the financial
institutions in whose favour the policy is to be issued.
v. Location of risk to be covered.
vi. Period of insurance.
vii. Whether insurance was declined by other insurers or accepted subject to
special conditions.
viii. Premium and Claim details for the past 3 policy periods.
2. Coverage
a) Whether Flood, Cyclone group of perils and/ or Riot, Strike, Malicious

damage, Terrorism are to be deleted from the basic cover.
b) Whether Plinth and foundation to be covered along with the building.
c) Whether Add-on covers required (List of these covers is included).
3. Details of Property
a) Type of property e.g. residence, office, hotels etc.

b) If shop whether hazardous goods (as per list) are stored; if so, whether
the stock value exceeds 5% of the total stock value.
c) If warehouse /godown (not located in a manufacturing unit), list of goods
stored.
d) If industrial / manufacturing unit
i. details of products manufactured

ii. whether factory working or silent
e) Fire Protection devices.

f) Utilities / Tanks / Gas Holders outside industrial / manufacturing risks.
g) Construction (material used for walls, roof, floor)
h) Height of building.
PROPOSAL FORM CHAPTER 5
i) Age of building
i. Less than 5 years

ii. 5 – 10 years
iii. 10 – 20 years
iv. Above 20 years
4. Details of Sum Insured
The basis proposed for insurance for buildings / machinery / furniture, fixtures,
fittings.
a) Whether on market value or reinstatement value?
b) Building wise values (separate values for kutcha buildings) as follows:
Amount in Rs.
Description Building Machinery F.F.F. Stock & Total
of Block including & Stock in
Plinth Accessories Process*
Note: *Indicates stocks covered on normal basis and not special basis)
c) Separate values for stocks covered on special basis
i. Floater basis Rs.

ii. Declaration basis Rs.
iii. Floater declaration basis Rs.
iv. Stocks stored in open (outside the factory compound) Rs.
d) Separate sum insured for Add-on covers for example, Architect’s Fees,
Debris Removal, etc.
5. Declaration Clause
I / We hereby declare that the statements made by me / us in this Proposal

Form are true to the best of my / our knowledge and belief and I / We hereby
agree that this declaration shall form the basis of the contract between me / us
and the “THE ……………………COMPANY LIMITED”.
If any additions or alterations are carried out in the risk proposed after the
submission of this proposal form then the same should be conveyed to the
insurers immediately. The impact of this declaration clause is to convert the
answers given by the proposer to become continuing warrantees and any
misrepresentation would permit the insurer to avoid the contract and disown
liability so incurred.

CHAPTER 5 RISK INSPECTION REPORT
This is followed by date, place and signature of proposer, recommendations of

Development Officer / Agent and, as required by Statute, and Section 41 of the
Insurance Act (Prohibition of Rebates)1938.
Test Yourself 1
In a proposal form, _______________ is used to convert the answers given by

the proposer to become continuing warrantees?
I. Endorsement
II. Declaration clause
III. Cover note
IV. Schedule
B. Risk inspection report
For manufacturing risks like large factories, huge plants or industrial complexes
with a large number of different blocks, a risk inspection report is submitted by
the insurer’s engineers.
1. Objective of inspection report
a) The main object of this report is to provide the underwriter with a

complete picture of the risk so that he is enabled to determine the rates
of premium and the terms of insurance and to facilitate easy
identification of the various blocks and drafting of the policy and the
preparation of the schedule and the specification.
b) Another important purpose of risk inspection is to make

recommendations to the insured in regard to risk improvement and
better housekeeping. Risk improvement may result in application of
lower rates of premium and discounts in premium. More importantly, risk
improvement will considerably reduce the loss potential and loss
prevention benefits not only the insured “but indirectly the entire
community”.
c) The inspection also presents the opportunity of securing valuable

information as to the past insurance and claims history of the insured
and his normal standing.
d) It is also useful to the company to assess the probable maximum loss and
to fix the retention under the risk and to arrange such reinsurance as is
necessary. In respect of large industrial complexes, it may be necessary
to submit the report to reinsurers.

RISK INSPECTION REPORT CHAPTER 5
2. Scope of a Risk Inspection Report
a) General information
i. The name of the proposer and the situation of the premises.
ii. A brief history of the insured’s factory and other points like worker
strength, industrial relations, general standing and reputation of the
industrial group as a whole etc.
iii. A detailed description of each building with particular reference to

constructional features, its occupation, age, state of repair,
maintenance, etc.
iv. Other constructional features relate to internal walls and partitions, fire-
proof doors, etc.
b) Lighting, Heating and Power
Detailed information is provided in respect of electrical installation which

has to be in conformity with the regulations of the Government, and
methods of heating, if any, used in the process of manufacture and the
sources of power used.
c) Process of Manufacture
i. A detailed description of the process of manufacture with reference to

general hazards arising from friction, dust explosion, inflammable
solvents and chemical processes and also specific hazards of the
particular industry.
ii. The nature and method of storage of raw material and finished goods,
accumulation and disposal of trade waste.
iii. In respect of machinery used in the process of manufacture, details of

age and condition of machinery are important.
iv. Lubrication of all power operated machinery, the quality/quantity and

the place of storage of lubricating oil.

d) Exposure
i. Construction and occupancy of buildings adjacent to the risk and the

nature of separation between the adjoining buildings and the proposed
risk.
ii. A description of the surroundings, example, empty yard, fields, railway,

etc., is to be given.
iii. The probability of conflagration hazard, usually present in large

industrial complexes, industrial estates and congested areas has to be
identified.
e) Fire Protection
i. Details regarding
 Portable Extinguishers
 Trailer Pumps
 Fire Engine
 Hydrant System
 Sprinkler System
 Fixed Water Spray System
ii. The position concerning fire brigade facilities and water supplies is
indicated by the following information:
 Distance of the premises from the nearest fire brigade station.
 Means of communication with the brigade.
 The location of the station and the number and nature of appliances.
 Accessibility of the premises for the fire brigade, i.e., a satisfactory

approach road to the premises.
 The position and number of hydrants.
 The situation of other available water supplies example, river, canals

or ponds

RISK INSPECTION REPORT CHAPTER 5
f) Management and supervision
Housekeeping includes such features as
i. General tidiness and cleanliness,

ii. Congestion,
iii. Disposal of waste,
iv. Storage of packing materials,
v. Proper arrangement of machinery and processes,
vi. Proper maintenance of the machinery by repairs,
vii. Overhaul and lubrication,
viii. Efficient supervision and
ix. Healthy employer-employee relationship.
g) Moral Hazard
Assessment of moral hazard is not an easy task. Moral hazard may exist in
different forms. However, general observations are made in respect of the
efficiency, respectability and commercial standing of the proposer, the
duration of trading, past failures in business, quality of labour etc.
h) Adequacy of Sum Insured
Although the inspecting engineer going for inspection is not a professional

valuer, he is required to express an opinion as to whether the amount
proposed for insurance approximates the value of the property on the date
of inspection, particularly buildings and machinery.
i) Insurance and Loss Experience
Information will relate to whether the insurance was declined or cancelled

or not renewed by other insurers.
Particulars of previous losses, if any, by fire or other allied perils, their

causes, the extent of loss, whether paid or repudiated and measures taken
to prevent a recurrence of such losses are also mentioned.
j) Risk Improvement
This may be regarded as one of the most important sections in the report.
The Engineer makes detailed practical suggestions in respect of desired
improvement of risk from the view-point of loss prevention.
Recommendations for risk improvement may be illustrated as follows:-
i. Erection of perfect party walls to obtain effective separation of risks.

ii. Elimination of constructional defects such as imperfect openings and the
like.

iii. Segregation of hazardous process e.g. spray painting from the main
manufacturing block
iv. Isolation of storage of hazardous goods such as petrol, celluloid, rubber
solutions, inflammable solvents
v. The use of non-inflammable solvents in the place of inflammable
solvents, whenever possible.
vi. The installation of fire protection devices; etc.
The Engineer would also indicate whether these suggestions have been
discussed with the proposer and the time-frame in which they are likely to
be carried out.
k) Conclusion
The inspection report is wound up with a final paragraph in which the

engineer gives his general impression of the risk with an indication of the
“probable maximum loss”. (This is elaborated in the chapter on
underwriting.)
Plan: A plan of the premises generally drawn at a scale of one inch to

40 feet is a useful adjunct to a report. A well prepared plan helps the
Engineer to describe clearly and the underwriter readily to appreciate, the
various features of the risk. It also facilitates the preparation of the
specification of the policy.
Site plan
-----------\ -----\ ------\ ------\ -----\

G F H I
------- ------ ------- ------- ------
-------- --------
K E
-------
J
------- ---------
D C
-------
A
----- ---------
L B

COVER NOTE CHAPTER 5
Block Description
A Security Office
B Cycle Stand and Car Park
C Canteen
D Administrative block
E Main plant building
F Godown for Raw materials
G Godown for finished goods
H Boiler house
I Sub-station and transformer house
J Research and Development Laboratory
K Compound wall
L Effluent treatment plant
Test Yourself 2
What is the objective of risk inspection report?
I. To act as an evidence of insurance protection

II. To authenticate all the additions or alterations made after the submission of
the proposal form
III. To provide the underwriter with a complete picture of the risk so that he is
enabled to determine the rates of premium and the terms of insurance
IV. To provide for all individual details of the insurance contract.
C. Cover note
Once the proposal form (and / or the risk inspection report if any) is received
the rates, terms and conditions are quoted to the proposer. Sec. 64 VB of the
Insurance Act 1938 is also brought to the notice of proposer that no risk can be
assumed unless and until the full premium is received in advance. After receipt
of full premium the policy is issued.
1. Acceptance cum Receipts / Cover note
There may be a time lag between the receipt of a proposal and the issue of the
policy. The insurers may require additional information for the issue of the
policy or they may like to arrange inspection of the risk.
Pending preparation of the policy, insurers provide evidence of insurance

protection through the issue of an Acceptance cum Receipt and / or a Cover
Note.

CHAPTER 5 COVER NOTE
Example
This evidence may be required by a Bank or Financial Institution who is

interested in the insurance.
The wording of these documents may vary among the insurers.
The contents of an Acceptance cum Receipt may include the following:
a) Policy No.
b) Period of Insurance
c) Agent / Development Officer Code
d) Policy issuing office details
e) Name of insured and address
f) Property covered
g) Perils covered
h) Sum Insured
i) Premium charged
j) Service tax
k) Total amount received
l) Details of cheque
m) Signature of company official
2. Schedule
The Schedule contains the following items:
a) Name and address of the proposer

b) Brief description of the property insured
c) Sum insured
d) Period of Insurance
e) Risks covered
f) Rate of premium
g) Premium (if the rate of premium is not immediately ascertainable,
provisional premium is indicated)
h) Serial number of the cover note
i) Date of Issue
j) Premium collection No. and date
k) Development Officer Code
l) Agent Code
The Schedule is followed by the signature clause.

POLICY DRAFTING CHAPTER 5
3. Operative clause
The operative clause of the cover note reads as follows:
“In consideration of the proposer named in the Schedule hereto having,

proposed to effect an insurance against Fire and allied perils for the period
therein, on the usual and conditions of this Company’s and having paid the
premium stated in the Schedule the property as described in the Schedule is
hereby insured to the extent of the sum insured mentioned therein.”
The cover note is made subject to the terms and conditions of the policy by the
following clause:
“The cover Note is issued pending preparation and issue of a duly stamped
Policy of Insurance and should the terms and conditions of this Company’s Policy
be unknown to the proposer, it shall be incumbent upon him to make
application to the Company for a copy of such terms and conditions. Failure to
comply with Policy terms and conditions through the Insured being
unacquainted with them shall not be excuse for his failure to act in accordance
therewith and by the acceptance of this Cover Note; the proposer binds himself
by the terms and conditions of this company’s Policy.”
Test Yourself 3
Which of the following can be issued by insurers as an evidence of insurance

protection, before the policy document is issued?
I. Risk inspection report

II. Declaration letter
III. Cover note
IV. Policy draft
D. Policy Drafting
Fire cover is drafted based on information furnished in Proposal Form and Cover
note, which is replaced by the Policy. The proposal form has been prescribed in
the Tariff and provides following information.
Definition
Drafting of the policies means completion of the schedule which forms part of
the fire policy.

CHAPTER 5 POLICY DRAFTING
1. The Policy Schedule
The Schedule provides for all individual details of the insurance contract.
The Tariff rules provide that policies covering buildings and/ or contents shall
show block wise separate amounts on
a) Building
b) Machinery and Accessories
c) Stock and Stock-in-Process and
d) Furniture and other contents
The Tariff prescribes that the wording of the policy is mandatory for all
insurers. It further provides that:
“Policy(ies) should be read together with proposal form, schedule, specification

endorsements, warranties and clauses as one contract for which suitable
format(s) may be devised by insurers”.
The format of policy schedule varies among the insurers. The code numbers in
the Schedule for various items of information are designed to generate
statistical data for various internal requirements of insurers.
Diagram 1: Format of policy schedule
The format provides for individual details of the policy which may be considered
to fall under three categories of data:
a) Identification details
b) Risk Description
c) Occupancy-wise Net Rate Data

a) Identification data relates to:
i. The name and address of insured and insurer.

ii. Policy number, Cover Note number, etc.
iii. Policy Period – From ………..hours on ……………. to Midnight on ……………..
iv. Shares of Co-insurers, if any.
b) Risk Description relates to:
i. Description of property – Risk address.

ii. Sum insured (block wise) – Net Rate – Premium.
iii. Applicable warranties and clauses with identification numbers – Name of
the Bank, if interested.
iv. Total Sum Insured – Total Premium – Special Discount 5% (applicable in
lieu of Commission, example, where Bank interest is involved) – Service
Tax - Net Premium.
c) Occupancy wise data provides for:
i. Risk Code / Rate Code / (as provided in Tariff).

ii. Rates for Building, Contents, etc.
iii. CED (Claims Experience Discount) and FEA (Fire Extinguishing Appliances)
iv. Net Rate – Building – Contents, etc.

A few illustrations of Risk Description and Block Description are provided.
Risk Description Risk Address Pin Code
L1 Bldg. Incl. Plinth & SANGAM CO-OP. SOC. LTD. MANPADA RD., 421201
Foundation, Pump House DOMBIVLI (E)
Sum Insured in (Rs. Lacs)
Reference Block Building Mach. Furniture Stocks Total Net Total
Description Acc. and cost Rate Premium
%0
L1 O1 B1 Dwellings 50.000 0.000 0.000 50.000 0.500 2500.00
0.000
L1 O1 B1 Contents 0.000 0.000 0.000 0.000 0.000 0.500 0.00
L1 O1 B1 1 Pump 1.000 1.000 0.500 50.00
House incl.
Pumps &
Motors
L1 O1 B1 2 1.000 1.000 0.500 50.00
Compound
Flooring,
Compound
W
L1 O1 B1 3 1.000 1.000 0.500 50.00
Underground
& Overhead
Water T
L1 O1 B1 4 Cables 1.000 1.000 0.500 50.00
from the
Main to the
Meter
L1 O1 B1 8 0.000 50.000 0.100 500.00
Earthquake
(Fire and
Shock)
Risk Description Risk Address Pin Code

L1 STOCK OF STEEL, 262, VERSHI KARA COMPL., BALRAJESWAR 400080
ALLOYS, METALS ROAD, MULUND (W), MUMBAI.
Sum Insured in (Rs. Lacs)
Reference Block Building Mach. Furniture Stocks Total Net Total
Description Acc. and cost Rate Premium
%0
L1 O1 B1 GODOWN 0.000 0.000 0.000 3.000 3.000 1.000 300.00
H GODOWN
L1 O1 B1 8 Earthquake 0.000 3.000 0.200 60.00
(Fire and
Shock)
The same approach is adopted for all types of risks.

Example
In the Schedule for a manufacturing risk the Block Description will be as follows:
a) Main manufacturing block

b) Boiler House
c) Godown for raw materials
d) Godown for finished goods
e) R & D Laboratory
f) Effluent Treatment Plant
g) Administrative Block
h) Compound Wall
2. Warranties and Clauses
For preparation of the policy schedule it is necessary to examine the warranties

and clauses attached to the policy.
Warranties are inserted for a specific purpose. All fire policies incorporate
warranties. Some warranties are of a general nature and common to a majority
of policies example, construction warranty.
a) Class of Construction
Warranted that the buildings are not of Kutchcha construction, consisting of

walls and / or roofs of wooden planks / thatched leaves and / or grass / hay
of any kind / bamboo / plastic cloth / asphalt cloth / canvas / tarpaulin and
the like.
b) FEA Warranty
When F.E.A. discount is granted the FEA warranty is inserted.
“Warranted that Fire Extinguishing Appliances in respect of which discount is

given shall conform to the Tariff Advisory Committee regulations and shall
be maintained in efficient working condition at all times and an annual
maintenance contract with an external agency shall be in force at all times
throughout the currency of this policy”.
c) Warranties are linked to the rates charged under the policy.
If shops are rated as ‘non-hazardous’, then it is warranted that storage of

following materials should not exceed 5% of the total stock.
A list of hazardous goods is included in the warranty. (Refer to para 29 of

chapter 4 for the list)

Similarly, when stocks stored in godowns and warehouses are of a “non-

hazardous” nature a lower rate is charged and therefore, a warranty is
inserted as follows:
Warranted that goods of Category I, II and III, coir waste, coir fibre, caddies
are not stored therein.
If Category I goods are stored, then it is warranted that goods of category II

and III, coir waste, coir fibre, caddies are not stored therein. (Note: Storage
of Category II and III goods, coir waste etc., carry a higher rate. Also, refer
to para 46 to 49 of chapter 4).
d) Tariff for manufacturing risks
Under the Tariff for manufacturing risks different rates are provided for the
same class of risk depending upon the type of process of manufacture.
Example
Paint Factories Rate per mille

Water based 2.00
Other than water based 3.75
Nitro-cellulose based 4.50
If the rate of Rs. 2.00 is charged, the policy will contain the following
warranties:
i. Warranted that other than water based paint, manufacturing is not carried
out in the premises.
ii. Warranted that Nitro-cellulose based paint manufacturing is not carried out
in the premises.
e) Printed forms of warranties
It is the practice to attach printed forms of warranties applicable to risks

commonly covered each warranty with a number. Whatever warranties are
applicable to a policy are mentioned in the schedule by their number.
Any warranty which is applicable to a specific risk and is not in the printed
form, it is typed in the policy.
f) Special Clauses
Special clauses, extensions, etc (if applicable) are also attached and
referred to in the Schedule.

Example
The policy is made subject to:
i. Agreed Bank Clause

ii. Reinstatement Value Clause
iii. Escalation Clause
iv. Local Authorities Clause
v. Earthquake Extension Clause, etc
Notes:
i. Architects Fees, etc., and Debris Removal Expenses up to a certain

limit are covered under the standard policy. These clauses are added to
the policy and referred to in the policy as “in-built” covers.
ii. If these fees and / or expenses are covered for higher limits as “add-on”
covers, then the relevant clauses are separately attached.
3. Endorsements
There are, as in the case of policy wording, numerous type of endorsement

wording in common use and the wording may vary as between companies.
Endorsements are issued for making the following changes, which are common:
a) Change in the name of the insured i.e. change in interest.

b) Incorporation of a Bank’s name or of a financial institution.
c) Change in the address or location of the property insured.
d) Alteration in the risk i.e. a change in its occupation or construction.
e) Variations in the sum insured.
f) Alteration in the period of insurance.
Any endorsement would have the same basic information as is found in the
policy format.
An endorsement alteration usually affects part of the policy only. Therefore,

all endorsements end with the following words:
“Subject otherwise to all other terms and conditions of this policy.”
Alternatively, the following words are used.
“All terms and conditions of the policy remain unaltered except as stated
above.”

Example
Some examples of endorsements are:
i. Additional Interest
“It is hereby declared and agreed that K. C. Shah of 17, of Sir. P. M. Road,
Bombay is also financially interested in the insurance by this policy as
Mortgagee.”
ii. Transfer by Will or Operation of Law
It is hereby declared and agreed that the interest in the insurance by this policy
is now vested in Central Bank of India as Executors of the within named A. B. C
and not as heretofore.
iii. Change of Address of an Insured
It is hereby declared that the address of the Insured is now the new address of
the insured as follows:
iv. Alteration of Risk
It is hereby declared and agreed that the premises described in this policy are
no longer used for manufacturing purposes and are silent.
As a consequence a return premium of Rs…………………is allowed to (insert next

renewal date) when the renewal premium will be Rs……………………
Notice shall be given to the Company when the said premises cease to be silent
and an additional premium paid as agreed ().
Resumption of work in premises previously endorsed as being silent.
It is hereby declared and agreed that the endorsement attached to this policy
dated ……………. is cancelled and the insurance hereby now stands as previously
set forth herein. Additional premium to (date of renewal of Rs……………………..)
Renewal Premium Rs……………….is hereby charged to the insured.

4. Renewal Notice
This is generally issued to the insured 30 days in advance of the expiry date of
the policy and it is purely a reminder as a matter of business courtesy.
It is not legally binding on the insurers to send a Renewal Notice and an insured
cannot plead non-receipt of this notice as an excuse to make the insurers liable
for any loss, should thereby any break between the periods of request for
renewal.
A renewal notice gives brief details of the policy. It takes into consideration all
the changes that have been made during the currency of the policy and calls for
renewal on the revised basis. On receipt of the renewal premium the procedure
followed is as outlined earlier.
Test Yourself 4
In the format of policy schedule, which of the following data will be included
under “Risk Description”?
I. Name and address of insured and insurer

II. Description of property
III. Risk code
IV. Claim Experience Discount

CHAPTER 5 SUMMARY
Summary
a) The following is a summary of the contents of the proposal form.
i. Details about proposer

ii. Coverage
iii. Details of the property
iv. Details of sum insured
v. Declaration clause
b) For manufacturing risks like large factories, huge plants or industrial

complexes with a large number of different blocks, a risk inspection report
is submitted by the insurer’s engineers.
c) The main object of risk inspection report is to provide the underwriter with
a complete picture of the risk so that he is enabled to determine the rates
of premium and the terms of insurance.
d) During the time lag between the receipt of a proposal and the issue of the
policy the insurers provide evidence of insurance protection through the
issue of an Acceptance cum Receipt and/ or a Cover Note.
e) Fire Policy is drafted based on information furnished in Proposal Form and

Cover note which is replaced by the Policy.
f) Drafting of the policies means completion of the schedule which forms part
of the fire policy.
g) The policy Schedule provides for all individual details of the insurance
contract.
h) The format of policy schedule varies among the insurers. The format
provides for individual details of the policy which may be considered to fall
under three categories of data:
i. Identification details
ii. Risk Description
iii. Occupancy-wise Net Rate Data
i) An endorsement has the same basic information as is found in the policy

format. An endorsement alteration usually affects part of the policy only.
j) Renewal Notice is generally issued to the insured 30 days in advance of the

expiry date of the policy and it is purely a reminder as a matter of business
courtesy.

Answer 1
In a proposal form, declaration clause can be used to convert the answers given
by the proposer to become continuing warrantees.
Answer 2
The main objective of risk inspection report is to provide the underwriter with a
complete picture of the risk so that he is enabled to determine the rates of
premium and the terms of insurance.
Answer 3
Before the policy document is issued, cover note is issued by insurers as an

evidence of insurance protection.
Answer 4
In the format of policy schedule, ‘description of property’ is included under

“risk description”.
Question 1
In the format of policy schedule, which of the following data will be included
under “identification details”?
I. Name and address of insured and insurer

II. Description of property
III. Risk code
IV. Claim Experience Discount

Question 2
What is meant by drafting of policies?
I. It means completion of the schedule which forms part of the fire policy
II. It means providing an evidence of insurance, before the policy document is
issued
III. It means filling up all the relevant information in proposal form by agent
IV. It means signing a declaration from the proposer, that all the information
provided by him is correct.
Question 3
If insured wishes to make Alteration in the period of insurance, then such

changes can be made in ________________?
I. Policy Draft
II. Declaration letter
III. Cover note
IV. Endorsement
Answer 1
Name and address of insured and insurer are included under “identification
details” of policy schedule.
Answer 2
Drafting of policies means completion of the schedule which forms part of the
fire policy.
Answer 3
If insured wishes to make alteration in the period of insurance, then such

changes can be made in Endorsement.

CHAPTER 6
UNDERWRITING
In this chapter we will learn about the concept of underwriting, its objectives
and underwriting factors, including PML estimation; PML error and PML Burst.
We will also look at the types of reinsurance, namely facultative reinsurance
and treaty reinsurance with application of PML concepts. At the end of the
chapter we will look at the new regulations and guidelines related to fire
insurance underwriting and classification of products followed in India and
internationally including Catastrophe Risk Evaluating and Standardising Target
Accumulations.
Learning Outcomes
A. Underwriting factors
B. Methods of reinsurance
C. Regulations and guidelines for fire insurance underwriting

CHAPTER 6 UNDERWRITING FACTORS
A. Underwriting factors
1. Concept of underwriting
The term 'underwriting' is broadly used to denote the principles and practices
concerning:
a) The acceptance or rejection of the risks,

b) The fixing of rates,
c) The total amount of acceptance,
d) The amount of retention for insurers own account and
e) Treatment of the balance through reinsurance
2. Objectives of underwriting
The ultimate underwriting objectives are:
a) The production of a large volume of premium income sufficient to

maintain and progressively enlarge an insurer's organisation and
b) The earning of a reasonable profit on the operations
3. Underwriting factors
Several factors enter into underwriting and these may be broadly classified as
follows:
a) The production of a well spread and a large volume of business;

b) The selection of the business;
c) The determination of the limits to be retained; and
d) The reinsurance of the surplus
a) The production of a large volume of business
This is governed by the need for wide distribution of risks class-wise and
geographically.
i. Class-wise distribution of risks: According to the law of average, which

is the fundamental basis for all insurance operations, it is unlikely that
all classes of fire risks would produce adverse results at the same time;
again, business obtained in certain classes may not be large enough to
produce average loss experience of the past. Therefore, obtaining
business in as many classes of risks as possible will have the effect of
averaging out the overall results.

UNDERWRITING FACTORS CHAPTER 6
ii. Geographical distribution of risks: Similarly, in the same class of risks,

one territory may produce profits at a time when another is showing
losses. The object, therefore, is to spread the business over as wide an
area and, to secure business from as large number of classes, as
possible. In insurance parlance this is called "Balanced Portfolio".
b) The selection of the business
This involves careful scrutiny of the business acceptances with a view to

making a proper assessment of the fire hazards involved. The right decision
will depend upon the insurers' assessment of the probability of
i. an outbreak of fire,
ii. of its spread in relation to the total value at risk and
iii. of a catastrophic loss
The assessment of these three aspects of the risk pre-supposes on the part
of the insurers thorough knowledge of the fire hazards of:
i. different kinds of building materials,

ii. different industrial processes,
iii. different types of goods and
iv. the methods of fire protection and extinction
In this respect, survey and inspection of risks at the time of underwriting

and claims are useful aids to the insurers.
c) The fixing of retentions
The underlying principle of insurance is the spreading of the losses of the

few over many. Too heavy a loss from a single fire event may cause a severe
strain on the funds of the insurers, which would affect the security of the
rest of the policy holders who have contributed to the "common premium
fund". Insurers are, therefore, naturally concerned with the amount of loss
likely to be sustained as a result of a fire, and, would take steps to limit
their liability to an amount that can be absorbed without undue strain on
their financial position.
Definition
The term "retention" refers to the amount which an insurer is prepared to

retain for own account on a risk; the alternative terms used are "limit" and "net
holding".

The fixing of retention is the essence of sound underwriting. The retentions

are fixed on the basis of the following general factors:
i. The financial status of the insurers, as reflected in capital and reserves.
ii. The premium income of insurers. It is obvious that an insurer with a

small premium income may not be able to sustain a loss which may be
easily absorbed by an insurer with a larger premium income.
iii. The experience in the class, which involves:
 The degree of fire hazard present

 The extent of the damage likely to be sustained
 The possibility of fire extinguishment
iv. The amount of premium income in the particular class of risk. If the
income is small, experience will be limited and lower limits will be found
necessary.
The individual features in the risks which affect limits may be considered
as follows:
i. Construction and occupancy: The physical nature of the risk, its

construction, size, and the processes carried on and the class of goods
stored or used therein. The limits vary according to construction and
occupancy. In respect of buildings with timber floors reduced limits are
applicable. When a building or group of buildings forming one risk is of
mixed forms of construction or is multiple occupancy, the predominant
hazard will determine the retention.
ii. The probable effects of any outbreak of fire on the stocks and the
possibilities of salvage:
 Incombustible or burn very slowly: Certain stocks are more or less

incombustible or burn very slowly such as metal goods and hardware.
 Burn moderately: Other stocks which burn moderately, such as
flour, tobacco, cotton, jute etc. are regarded as high burning stocks
 Burn with great intensity: Stocks like spirits of all kinds, celluloid
burn with great intensity.
The question of salvage is important and the governing factor is the

degree of susceptibility of stocks to damage by fire, smoke and water.
Brittle and easily damageable goods such as glass frames, crockery,
watches and clocks, carpets, etc. although in themselves non-hazardous
attract the lower limits applicable to hazardous goods.

iii. Fire protection: The nature and number of fire extinguishing appliances,
fire brigade facilities, sprinkler installation etc. are factors which are
considered. For risks carrying discount for fire extinguishing appliances
sanctioned, the limits are increased.
iv. The situation of the risk: This is considered from three points of view:
 The degree of exposure hazard existing from adjacent or contiguous

properties,
 The actual situation whether in cities, towns or the mofussil, and
 "Conflagration hazard", i.e. hazards from the adjoining buildings
communicating with insured premises.
Based on the above factors, the amount of retention is arrived at after

taking into account two factors, the "probable maximum loss" (PML) for a
class of risk and the "maximum amount of loss" (MAL) the insurer is prepared
to retain for that class of risk.
Definition
The term ‘Maximum Probable Loss’ (also known as “Estimated Probable Loss” –
EML) refers to the insurer’s estimate of potential liability in the worst event.
Example
In a large factory with a total sum insured of Rs. 100 crores, spread over many
blocks in a large area, the risk engineers after inspection may determine that
the highest PML may be Rs. 25 crores restricted to one particular process block.
If retention is fixed with reference to sum insured i.e., Rs. 100 crores, it will be
of smaller amount and consequent ceding a large portion by way of reinsurance.
However, on the PML basis, insurers are able to fix a larger retention.
Estimation of the amount: Individual underwriters had to resort to their

personal perceptions in approaching the issue of estimating the amount of
such maximum loss. It, therefore, becomes essential for them to justify the
estimates with proper explanations to reinsurers. The philosophy of such a
maximum loss varied from underwriter to underwriter leading to use of
various terminologies such as:
i. PML: Probable / Possible / Potential maximum loss

ii. MPL: Maximum possible / probable / potential loss
iii. EML: Estimated maximum loss
iv. MFL: Maximum foreseeable loss

Definition
Possible means (something) that can happen
Probable means (something) capable of being proved or which may reasonably

be expected to happen, wherein reasonable is meant in the sense of having
sound judgement or sensible or as is judged appropriate or suitable to the
circumstances or purpose.
The estimates are essentially personal ones and a number of subjective

factors get involved as they depend upon the estimator’s judgement of type
of plants / processes, insured perils plus knowledge and experience of
comparable risks. The estimates are also exposed to numerous fluctuating
factors such as rising costs on building / machinery, increasing concentration
of values, changes in process and technology etc. They, therefore, need to
be continuously reviewed.
i. PML Concept is one of the main tools used in underwriting, especially in

property insurance underwriting. The understanding and use of PML
concept enables an insurer to
 Maximise his retention capacity and the returns,

 Control the exposure for the own account and
 Use the right combination of reinsurance techniques to manage the
risk
ii. Net Retention Capacity: The maximum amount of ‘risk’ (property

located in one compound in terms of sum insured or PML) that can be
assumed for the own account of an insurer, in respect of single ‘risk’ is
termed the Net Retention Capacity. This capacity is determined by the
factors such as Net Worth, Premium Volume, Spread of the portfolio,
adequacy of premium rates, loss ratio, etc., and finally the management
philosophy.
A portfolio or a class of Fire Insurance business operating with adequate

premium rates over a long period can balance itself and produce reasonable
profits to the insurer. However, the insurers’ portfolio, is in the short term,
exposed to the effect of single large losses (risk losses) and or an extra
ordinary number of small losses or series of cat events (catastrophe losses)

iii. PML Assessment Factors: These can be classified into broad categories
as under:
 Technical information relates to physical risk factors and includes in
 Insurance Information relates to information of policy (ies) details

including type of coverage, insured perils, breakdown of values
between different sub units / sections, extension of coverage
relating to factors of interdependency and dependency on external
sources (suppliers / customers extensions) combination of covers (All
Risk, Packages etc.)
 Third Party Information relates to information on insured’s

obligation to other parties, goods held in trust, contractual
agreements with third parties.
 Causes of Loss Information relates to information on the exact cause

of loss to be considered for PML assessment and obviously vary across
each class of risk which can be grouped under operational failures
and environmental perils and other extraneous covers.
Logical considerations of the above can convince the underwriter of

soundness of his judgement and have his broad approach for working out
maximum loss estimates.
Where explosion is considered as the loss scenario for PML estimate, a

quantitative approach is adopted to determine the damage potential of
materials of explosion. These relate to:
 Unconfined Vapour Cloud explosion

 High pressure equipment rupture and
 Dust cloud explosion
DOW Chemical’s Manual is used for the purpose of hazard quantification by

working out the fire and explosion index. ROA had published a set of
guidelines approach in respect of petro chemical risk of which deals with the
loss scenarios of Vapour Cloud explosion and Liquid Pool Fires.
iv. PML Error / PML Burst
The term generally denotes an actual loss being larger in size than PML
estimates. Too low an estimate of PML and resultant higher retention by the
cedent may unduly overburden his net account on large losses and may also
prove disastrous in the event of a PML BURST
In some cases, retention levels are related to the sum insured.

Example
For example Fire Policies on simple risks such as dwellings, offices, etc., up to a
sum insured Rs. 30 crores are fully retained by the companies for their own
account.
d) Reinsurance
Reinsurance is an arrangement whereby Direct Insurer who has insured a risk

insures a part of that risk again with another insurer, that is to say,
reinsures a part of the risk in order to reduce his own liability. The
difference between the retention and the total amount of acceptance is
reinsured.
Thus, it will be seen, that limiting of retention and effecting of reinsurances

brings about a wider distribution of the risks and secures to the insurer the
full advantage of the law of average. Reinsurance is thus seen as an
extended application of the insurance principle viz., spreading of risks.
Objects of reinsurance: The other objects of reinsurance are:-
i. Limitation of liability to an amount which is proportionate to their

finances is made possible for insurers.
ii. It makes for stability in underwriting and consistency in underwriting

results over a period.
iii. It provides a safeguard against serious effects of conflagrations.
iv. A sound system of retentions and reinsurance assists in the steady

accumulation of reserves.
v. Creates an automatic capacity to accept large risks.
Test Yourself 1
Which of the below is / are alternative terms used for ‘retention’?
I. Limit
II. Net holding
III. Both of the above
IV. None of the above

METHODS OF REINSURANCE CHAPTER 6
B. Methods of reinsurance
There are two main methods of reinsurance:
 Facultative and
 Treaty
The main feature of the facultative method is that each risk is reinsured
individually. The reinsurer to whom the risk is offered has the choice or the
faculty of either accepting or rejecting the risk. This method involves
considerable amount of clerical work and has been largely replaced by the
treaty method. However, facultative method is still used to supplement the
treaty facilities. There may be risks which are outside the scope of the treaty,
because of their size or their nature, or the insurers may not like to include
certain types of risks in the treaty to protect that the treaty results not turning
unfavourable to the reinsurers. In such cases, facultative method is resorted to.
There are two types of treaty reinsurance:
 Proportional and
 Non-proportional
1. Proportional Treaties
Under proportional treaties the ceding company decides the part of the original
insurance, it wishes to retain for its own account and cedes the balance to the
reinsurer. Premiums and losses are shared in the proportion that the ceding
company's retention and the reinsurers share bear to the sum insured of the
original insurance. The most common forms of proportional treaties are
 Quota Share Treaty and

 Surplus Treaty
By using a proportional reinsurance (Quota Share Treaty, Surplus Treaty or

Facultative Reinsurance) the risk from large and / or hazardous risks is
transferred out, thereby limiting the exposure to the Net Retained account from
large single losses.
Proportional reinsurance can also facilitate insulation from the effect of

catastrophe losses. Excess of Loss (Non-proportional) reinsurance is more
effective way of handling catastrophe exposures.

CHAPTER 6 METHODS OF REINSURANCE
a) Quota Share Treaty
Under a quota share treaty, the ceding insurer is bound to cede and the
reinsurer bound to accept a fixed share of every risk coming within the
scope of the treaty. Obligatory cessions of certain % of all the business to
the GIC may be regarded as Quota Share Cessions.
b) The Surplus Treaty
The purpose of this treaty is to reinsure the surplus of a risk beyond the
amount of the ceding insurer's retention. The extent to which the surplus
can be reinsured is determined by the size of the treaty measured in terms
of 'lines'.
A 'line' is equal to the ceding insurer's net retention. Under a twenty line
treaty reinsurance protection is made available up to an amount equal to
twenty times the retention of the ceding insurer. This treaty is called a 'first
surplus treaty' and may be supplemented by a 'second surplus treaty' to
absorb the amounts which are beyond the capacity of the 'first surplus'
treaty.
The salient provisions generally found in a surplus treaty are as follows:
i. The scope of the treaty is defined with reference to the number of lines,
the geographical area and the class of business.
ii. It is provided that the liability of the reinsurer shall commence

obligatorily and simultaneously with that of the ceding insurer as soon as
the retention of the ceding insurer is exceeded.
iii. The ceding insurer is required to record particulars of all amounts ceded
to the reinsurer who is entitled to inspect such records.
iv. All losses in respect of which the reinsurer's share is estimated to exceed
an agreed figure are required to be advised to the reinsurers within
specified period of the receipt of information by the ceding insurer.
v. All settlements, adjustments and compromises of claims including ex-

gratia payments made by the ceding insurer are binding on the reinsurer,
provided the cause of loss is within the scope of the cover.
vi. Whenever loss attaching to the treaty exceeds an “agreed amount” the
ceding company has the right to call for immediate payment from
reinsurers their share of loss. Such “agreed amount” is known as “cash
loss limit” under the treaty.
vii. The ceding insurer retains an agreed percentage of the annual premium
as a premium reserve which is adjusted subsequently in the accounts.

viii. Accounts are rendered on fixed intervals like quarterly or half yearly
basis.
ix. The treaty may be terminated by either party on giving the prescribed
notice.
x. Provision is made for settlement of disputes through arbitration.
A comparison between surplus treaty and facultative methods of reinsurance

may be made as under:
Surplus Treaty Facultative

The advantage of treaty method is the
obligatory nature of reinsurance
acceptances. The reinsurer cannot decline
to accept any cession coming within the
scope of the treaty. This facilitates direct
underwriting and enables the ceding
insurer to give cover for large amounts
immediately.
Treaty reinsurance involves much less In facultative reinsurance each
clerical labour and general costs, because case is treated separately
the acceptances are dealt with in bulk involving considerable amount
with only periodical submission of limited of documentation.
information.
The rights and obligations of each party The facultative reinsurance
are clearly defined in the treaty contract is expressed in a
agreement. reinsurance policy which being
a brief document is open to
problems of interpretation.
From the reinsurer's point of view, treaty
ensures a constant and regular flow of
business and gives it a good spread of
risks.
Reciprocal exchange of business is possible This facility is not available
under treaty reinsurance methods either under facultative method.
on the basis of profitability of treaties or
premium volume.
PML concept in proportional treaties
As compared to sum insured underwriting, the PML underwriting can provide

a much higher capacity to insurer. In case an actual loss is more than the
maximum loss expected by an insurer in terms of number of lines; reinsurers
impose a “minimum PML condition” to limit the number of lines. The
condition stipulates that the PMl factor (expressed as a percentage of Total
Sum Insured) used for any risk shall not be less than a specified percentage.
This could vary from 20% to 50%.
CHAPTER 6 METHODS OF REINSURANCE
Example
Sum Insured Rs. 300 crore

PML estimated by Risk-Engineer Underwriter 6% i.e. Rs. 18 crore
Net retention 1 Crore = 1 / 18 * 100 = 5.56%
Surplus Treaty (10 lines) 10 Crore = 10 / 18 * 100 =
55.56%
Actual loss 100 crore
Treaty share loss 55.56%
When a reinsurer expects a maximum loss of Rs. 10 crore; he is faced with a

situation of Rs. 55.56 crore losses. If the minimum PML is 20% then the
maximum sum insured exposure is limited to 5 times the Net Line.
The Treaty reinsurer is not privy to underwriting information on each and

every risk, he should use the ‘Minimal – PML condition’ to restrict his
exposure under the Treaty. The treaty reinsurer is more of a financier than
a Risk-Engineer Underwriter.
The Facultative Reinsurance Underwriter is privy to the full underwriting

information of a risk and would view it with same degree of finesse as a
Direct Underwriter Engineer, consequently he can make use of the capacity
to write a good risk when he knows it to be better quality by taking
advantage of very low PML.
Typically for a very large risk being covered by a single insurer, the net
retention will be a small percentage, the treaty reinsurer will cover may be
a third of the risk, while a major chunk of the risk will be covered by a
facultative reinsurer.
PML for accumulation control in proportional treaties
The Treaty Limit refers to the Sum Insured or PML that may be ceded to the
treaty on a single Risk. Since proportional treaties cover a large number of
risks, they are prone to “accumulation” risk in respect of catastrophe perils
such as EQ or Flood etc.
Based on risk profile data and other underwriting information an estimate of

the CAT–PML for the treaty is arrived at. In hard market conditions,
reinsurers insist on additional control measures / restrictions in the form of:
i. Aggregate Cession Limit

ii. Per Event Loss Limit
iii. Annual Loss Limit to reduce the scope of cover to ceding insurers on
treaties

2. Non-Proportional Treaties
Non-proportional treaties do not apply to specific risks but to losses covered

under the portfolio. The insurer limits the amount of loss for any one claim
which is called the deductible (underlying limits). The reinsurer agrees to pay
that amount of the loss over and above the deductible subject to an upper limit
which is called the ‘overlying limit’. This methodology is adopted to keep a tab
on total incurred claims.
a) Excess of Loss Treaty
Inspite of the protection afforded by facultative and surplus treaty

reinsurance, a catastrophic loss may still make heavy inroads into the funds
of the insurers. The large accumulation of values in modern industrial risks
has exposed insurers to the risk of a heavy loss caused by a single fire.
Further the transaction of 'special perils' insurance involves an element of

catastrophic loss which may be caused by riots, earthquakes and water
damage group of perils. The underwriting of risks in a conflagration district
or a congested area introduces a similar problem.
i. PML in CAT XoL
CAT Excess of Loss (XoL) cover protects the insurers Net Retained Account
from losses of catastrophe nature e.g. losses caused by weather perils such
as STFI ; natural perils such as EQ and resultant tsunami, landslide bush fire
etc. and political risks such as Riots, SRCC or even conflagration.
The underwriters keep Risk XoL (individual single large loss) and CAT covers
(event losses) separate from each other by “two risk warranty” clause. For
an event loss a minimum of two separate risks should have been affected by
the same event.
A fire or explosion in an industrial complex will not be recoverable under

CAT XoL even if loss amount on the Net account could be larger than the
underlying priority of CAT XoL. Therefore, the CAT Xol Cover purchase is
determined on the maximum loss potential from a single CAT event. The loss
potential is not the same as Aggregate Exposure (aggregate of the sum
insured on all risks so retained for Net Account) can be used to arrive at a
reasonable estimation of loss potential, but is directly proportional to it.
PML estimation methods such as ex tools a method developed by Swiss Re.
It is therefore, important for insurers to monitor their net account

Aggregation very carefully.

CHAPTER 6 REGULATIONS AND GUIDELINES FOR FIRE INSURANCE UNDERWRITING
Test Yourself 2
In which of the reinsurance methods, each risk is reinsured individually?
I. Facultative
II. Treaty
III. Quota share
IV. Surplus
C. Regulations and guidelines for fire insurance underwriting
1. Peril wise monitoring
While monitoring aggregate exposure one should distinguish among perils in

terms of their nature of producing loss and area of occurrence. Munich Re’s
World Map of Natural Hazards has graphically documented the known natural
hazards across the globe into a map.
Aggregate exposure monitoring is done by dividing the geographical area in to

manageable units and monitoring total sum insured exposure in these units
which could be Postal Zone, PIN code, District or State. Specially designed GIS
based software is now available for monitoring this data. Satellite design based
monitoring technology is also in vogue in developed countries.
A judicious decision is necessary, since effort and cost are involved to

determine unit area for monitoring e.g. state level unit for windstorm or
earthquake exposure; a district level unit for flood and for manmade perils like
terrorist attacks or industrial accidents a finer definition. In the absence of
detailed data PML estimates tend to be higher. A further refinement is possible
if the aggregates are monitored separately for buildings and contents.
2. Over estimation of PML vs under utilisation of capacity
As the insurer is interested in knowing PML for the net retained account, the
data needs to be segregated into small, medium and large risks information and
underwriting break up needs to be applied to arrive at that portion of exposure
applicable to Net Retained Account.
All India Fire Tariff (AIFT) classifies India into four EQ zones with respect to
frequency and severity. It is therefore necessary to refine the grading /
classification given in the tariff as an indicator to a micro level. Therefore, it is
necessary to attach a severity / frequency coefficient to each of these geo
units. This coefficient factor is nothing but a PML factor derived empirically.

REGULATIONS AND GUIDELINES FOR FIRE INSURANCE UNDERWRITING CHAPTER 6
The PML factor is applied on the known Aggregate exposure sum insured to
arrive at a potential cat event loss. This computation is repeated over different
geographical zones, collectively, once for each group of unit zones which are
exposed to a single event. The highest of such values represents the amount of
catastrophe protection the insurer needs to buy.
The protection against catastrophic loss is provided by 'excess of loss'

reinsurance which limits the maximum loss that an insurer is exposed to under
any one event. An 'excess of loss' reinsurance comes into operation when the
total net loss suffered by the insurer due to one event exceeds the figure
agreed in the treaty, such excess of the amount or a proportion of it, being paid
by the reinsurer subject to a maximum limit.
The net loss means the loss computed after taking into account recoveries from
facultative and treaty reinsurers. If the total net loss exceeds the maximum
limit provided in the treaty the excess amount remains for the account of the
ceding insurer. It may, however, be absorbed under a second excess of loss
treaty. For example, an insurer can avail protection under excess of loss cover
by arranging it in different layers (say layer 1, layer 2, and so on) wherein the
preceding layer will be the underlying for the succeeding layer.
Example
A company is prepared to absorb a loss, due to any one event, up to Rs. 50,000.
It estimates that the maximum exposure per event to be Rs. 2,00,000. Excess of
loss reinsurance is arranged for Rs. 1,50,000 in excess of Rs. 50,000.
It will be seen that this treaty does not involve any proportionate sharing of
risks, as in quota share or surplus treaties. The question of premium payable for
the excess of loss protection therefore becomes complicated. The premium will
naturally depend upon the nature and extent of reinsurance required and the
composition of the fire portfolio of the insurer. The rate is decided, depending
on the exposure of the cover to losses, and on a “burning cost” method.
The ‘burning cost’ is arrived at by taking a fixed period (say 4 years) and
computing the ratio of the claims paid and outstanding for the share of the
excess of loss reinsurers to the gross net premium income of the company for
the period. This gives the ‘pure burning rate’ (that is sufficient to cover the
losses suffered by the reinsurers) which is loaded by a factor say 100/70 or
100/80, to cover reinsurer’s acquisition costs, administrative costs, profit
margin to produce the final rate.

Example
Gross Net Premium Rs. 55,00,000 (4 year period)

Incurred Losses Rs. 1,18,000 (4 year period)
Pure burning cost
= 1,18,000 X 100
55,00,000
= 2.145
Loaded burning cost with factor
= 2.145 X 100
100/70 70
= 3.064 (This is the rate for the cover)
(Note: There are other methods of rating also which can be perused by the
reader from appropriate Reinsurance Books)
There are other types of Excess of Loss covers.
Some examples are:
i. ‘Per Risk’ Cover: This is arranged to protect loss affecting an individual

risk e.g. a single fire loss in excess of loss retention.
ii. ‘Per Event’ Cover: This is arranged to loss affecting more than one risk
and arising due to natural perils like floods, cyclone, earthquake, etc.,
or social perils like riots.
The reinsurers, too, need reinsurance protection to limit their liabilities to their
financial position. Hence, the reinsurers themselves resort to reinsurance to
protect their portfolio. This is called ‘retrocession’.
3. Catastrophe perils in India
AIFT classifies India into four EQ zones with respect to frequency and severity.
i. Parts of western Gujarat, some parts of HP. Assam, and a part of

Maharashtra, Andaman Nicobar Island etc. are on high intensity zone.
ii. South eastern states of TN, AP and Orissa are exposed to recurring
tropical cyclones during November – December period. Tsunami is new
discovery now.
iii. The Ganga Belt, Uttaranchal to UP, Bihar, Jharkhand and West Bengal
and Assam are prone to floods with a high frequency every monsoon. A
flood in Mumbai has produced the largest insurance loss in India till date
estimated at Rs. 30,000 crores.

4. International classification and nomenclature
a) Catastrophe Risk Evaluating and Standardising Target Accumulations

(CRESTA) Determination
The CRESTA organisation was established by the insurance and reinsurance

industry in 1977 as an independent body for the technical management of
natural hazard coverage.
CRESTA's main goal is to establish a uniform and global system to transfer,

electronically, aggregated exposure data for accumulation risk control and
modelling among insurers and reinsurers. Today, the standards are generally
accepted and applied throughout the insurance industry worldwide.
Although the information provided here is available to everyone, it is aimed
primarily at the insurance industry.
CRESTA provides country - specific zones for the uniform and detailed
reporting of accumulation risk data relating zones and forms etc. CRESTA
has 19 catastrophe zones for India. Information on cat-zones can be
downloaded from website www.cresta.org.
b) CRESTA's main tasks are:
i. Determining country-specific zones for the uniform and detailed

reporting of exposure data usually relating to natural hazards.
ii. Promoting a template to exchange exposure data in the industry based
on the ACORD standard
iii. Offer a mapping service to visualise values based on CRESTA zones
None of the listed and published works is in any way binding.

CRESTA makes no recommendations on the insurance and reinsurance of
natural hazards but merely seeks to provide information on existing
regulations.
5. Indian Fire Reinsurance Programme
The Indian Fire Reinsurance programme is reviewed annually and arranged by

GIC in consultation with its four subsidiary companies and finally approved by
the Government of India. The objective is to maximise retention within the
country in order to save foreign exchange outgo and to achieve this the
following methods are adopted.
a) Underwritten on Probable Maximum Loss (PML) basis: Fire reinsurance

in India is underwritten on Probable Maximum Loss (PML) basis, which
means retention limits are decided based on the PML of a risk and in
simple risks on sum insured basis.

b) Obligatory Cessions: Quota Share Cessions of all the business, written by

any company is ceded to GIC. This is a statutory requirement and such
Cessions are called obligatory Cessions. This is retained entirely within
the country and protected by Excess of Loss cover.
c) Classification of risks: The surplus after obligatory cessions is dealt with

depending on sum insured and probable maximum loss. For this purpose,
risks are classified into ‘non-risk’ booked, ‘risk-booked’ and ‘listed’
risks.
d) Non-booked risks: The surplus after obligatory cessions in non-risk

booked portfolio is entirely retained by the companies and protected by
excess of loss cover.
e) Market Fire Pool: The Indian market also has a Market Fire Pool formed
by all the four companies which is being managed by GIC. Companies are
required to make a cession of 30% of the balance after obligatory
cessions and net retention to the Market Fire Pool subject to maximum
of pre-determined amount either sum insured or PML in respect of
medium sized risks and listed risks. The cessions to Market Fire Pool are
retained in India subject to excess of loss protection.
f) Listed risks: In respect of still larger risks, (listed risks) the surplus after
cession to the Market Fire Pool is ceded to first surplus treaty and any
further surplus to the second surplus treaty. These treaties are arranged
by each of the four Companies, after deciding their retentions. Any
further balance is ceded to the Market Surplus Treaty (arranged by GIC)
and, thereafter, if necessary to facultative cover.
g) GIC Facultative: Surplus over gross capacity of the market is reinsured

with GIC facultative and protected by Excess of Loss cover. The net
retained facultative account is shared by GIC and the four companies in
equal proportion i.e., 20% each.
The actual arrangements are given below for the purpose of illustration. The
student should note that these are subject to review every year.

6. Indian Reinsurance Programme w.e.f 01-04-2001
5% QS under four Categories (Max. 50 Cr PML)

Simple Policies, Medium Size Risk, Listed Risk up to 250 Crore PML and Listed
Risk above 250 Cr PML
a) Net retention is in conformity with Solvency Regulations
The limit reflects Capital, General reserves, Net Written Premiums, Loss
Experience. It is from Rs. 2 Cr PML of a private insurer to 70 Cr PML for
Govt. Insurers subject to change depending upon Financial Strength of
Insurers.
b) First surplus treaty: Different scenario of Market for each insurer as

opposed to retentions.
Treaty Limits are high for private insurers, low for Government Insurer
Limits. It can be varied to increase gross risk exposure.
c) Market surplus provides additional Rs. 100 cr PML. Surplus ceded to

Market Surplus is that which exceeds 10% QS + NET + First Surplus.
d) GIC peak risk Excess of Loss provides additional capacity of Rs. 1500 Cr
PML. As a matter of diligence GIC further protects India and Overseas
Inward acceptance by Risk & Catastrophe XL Programme.
The student should note that these are subject to review every year.
e) Non-Risk booked Risks: Small policies (Non-Risk Booked)
Risks which have a sum insured up to Rs. 30 crores are classified as small
policies. These types of risks are not entered in the risk register; hence they
are called ‘non-risk-booked’. These risks are retained 100% within the Indian
market as under and protected by ‘excess of loss’ covers.
GIC Obligatory Cessions 05.00% (subject to Rs. 500 Cr Sum Insured)

Company Net Account 95.00%
Total 100.00%
f) Medium sized risks (Risk Booked): Risks which have a sum insured
greater than Rs. 30 crores and probable maximum loss less than Rs. 26
Crores are classified as medium sized risks. These risks are entered in
the register and are termed as Risk Booked. The underwriting of medium
sized risks is as under.

Obligatory 05.00%
Net account 60.00%
Market fire pool 30.00%
Cos. fire surplus treaty 05.00%
Total 100.00%
The Indian market retention for Medium Size Risks is 95%.
g) Listed Risks: All risks having a PML greater than Rs.26 crores are
classified as listed risks.
Illustration: Underwriting of Risk with PML: Rs. 4000 million.
Obligatory Cession 05% i.e. Rs. 200 million

Fire Pool Cessions 150% i.e. Rs. 400 million
Company Net Account 15% i.e. Rs. 600 million (Rs. 100
million each company)
Companies Fire Surplus Treaty 17.5% i.e. Rs. 700 million (Rs. 175
million each Company)
Market Surplus Fire Treaty 50% i.e. Rs. 2000 million
Fire Facultative Reinsurance 2.5% i.e. Rs. 100 million
Total 100% i.e. Rs. 4000 million
The underwriting of listed risks is centralised at GIC. Each Company sends

prescribed returns to GIC which are:
i. Large Risk Advice: This form is used for entering Risk data at the time of
attachment of a new listed risk or modifications of existing listed risk
information.
ii. Policy copy
iii. Endorsement data on the policy
iv. Large Loss Advice: This form is used for entering estimated loss data.
v. Large Loss Payment Advice: This form is used for entering Paid Loss
data.
Various Reports are generated from these forms by GIC on a quarterly basis like
premium bordereaux, loss bordereaux, etc. which give the premium and loss
distribution of every risk for all the portfolios. Co-insurance share of the four
companies is also provided.
The preceding notes reflect the traditional approach to underwriting. After

liberalisation of insurance, the IRDA has introduced new perspectives through
their Regulations.

7. New regulations in fire underwriting
The key ingredients of general insurance product pricing are:
i. Claims cost;
ii. Business acquisition cost;
iii. Management expenses;
iv. Margin for fluctuation in claims experience and
v. Reasonable profit
a) Claims Costs
The core premium is arrived based on past loss experience or the “burning
cost” arrived by using the standard formula viz.
L/V * 100
where
L is the incurred losses and

V is the values insured
This pure rate is normally loaded with acquisition costs, management

expenses, reserves for catastrophe risks and final rate is arrived by adding
suitable margin for profit.
Since claims cost is the major element in pricing the insurance product and
as losses are ultimately a national waste, insurance companies in co-
operation with their customers, should make concerted efforts for risk
improvement, loss prevention and claims minimisation. This could help to
bring down the premium rates.
Towards more equitable product pricing, the following steps need to be

taken:
i. Claims costs should be controlled by improved application of loss control

and risk management techniques;
ii. Concerted efforts should be made to comprehensively review and reduce

the management expenses ratio.
iii. The companies should review the rates frequently in light of changing
claims experience in various classes of risks.
iv. Insurers should step up their efforts to provide quick and equitable
settlement of claims so as to create a perception among people that
their interests are better served by companies than by litigation.

b) Acquisition Costs
According to the new File & Use guidelines, Margins built into rates shall be
consistent with the experience of the insurer in respect of commission,
management expenses, contingencies and profit. The margin for commission
built into the rates should be that level at which commission or brokerage
will be paid.
c) Management Expenses
Expenses of management will generally reflect the overall expense ratio of

the insurer in recent past.
Thus, insurer should take the above parameters into consideration while
designing the products and pricing should be based on appropriate data and
with technical justification. Once the insurer arrives at the base price,
where any class of risk may be deemed normal, the basic premium rate can
be charged. However, using the principle of discrimination, the reduction or
loading can be done taking into account the favourable and unfavourable
features present in the risk.
8. Guidelines on File & Use Procedures for General Insurance Products
By virtue of powers vested in the Authority under Sec.14 (2) (i) of the IRDA Act,
1999, Circular 021/IRDA/f&u/Sep-06 was issued on 28th September, 2006 by
IRDA enumerates the File & Use requirements for general insurance products.
One of the pre-conditions for acceptance of products filed with the Authority is
only after the insurer has filed the Underwriting Policy as approved by its Board
and satisfied any queries raised by IRDA thereon.
IRDA requirements for consideration and review of products under File & Use
guidelines along with underlying logic are as under:
i. Design and rating of products must always be on sound and prudent

underwriting basis. The contingencies insured under the product should
be clear and provide transparent cover which is of value to the insured.
Prudent underwriting means that the insurer should only offer insurance of
risks that are quantifiable and manageable and where the premium can be
properly assessed. The cover should be clearly defined and should provide
cover that is of value to the person insured.
ii. All literature relating to the product should be in simple language and
easily understandable to the public at large. As far as possible, a similar
sequence of presentation may be followed. All technical terms should
be clarified in simple language for the benefit of the insured.

There should be no effort to mislead the reader to assume that the product
is offering protection that it really does not, or that it offers such protection
subject to limitations and conditions that are not easily apparent.
iii. The insurance product should comply with all the requirements of the
Protection of Policyholders’ Interests Regulations 2002.
In case of some personal lines products, there should be provision to inform

the policyholder well in advance of expiry date if his insurance is not to be
renewed. Where renewal is offered subject to terms being mutually agreed,
it should not be treated as a means of avoiding renewal by insisting on very
high renewal premium.
iv. Insurers should use as far as possible, similar wordings for describing
the same cover or the same requirement across all their products. For
example clauses on renewal of insurance, basis of insurance, due
diligence, cancellation, arbitration etc., should have similar wordings
across all products.
Wordings should be in simple language that is easy to follow. Where

renewal is not automatic in a class of business where there is an expectation
of continuity such as health insurance, the prospectus should clearly say so.
The policy should provide simple disputes resolution procedures and also
state in simple language the process of arbitration of disputes.
v. The pricing of products should be based on appropriate data and with

technical justification.
vi. The terms and conditions of cover shall be fair between the insurer
and the insured.
The conditions and warrantees should be reasonable and capable of

compliance. The exclusions should not limit cover to an extent that the
value of insurance is lost. The cover provided should be of value to the
policyholder and should offer needed protection. The policyholder should
not be forced to buy covers that he / she does not need as a pre-condition
of being granted cover that he / she needs. The time allowed for reporting
of claims should be reasonable. The policyholder should not be required to
do things that are onerous after a claim to maintain his eligibility for
protection nor should the policyholder be prevented from resuming his
business expeditiously by the claims process.
vii. Margins built into rates shall be consistent with the experience of the
insurer in respect of commission, management expenses, contingencies
and profit.

viii. Insurer should take necessary steps in ensuring that competition will not
lead to unprincipled rate cutting and other improper underwriting
practices.
Although this is a statement of the obvious, the fact that an insurer has to
provide such a confirmation should act as an indirect deterrent to improper
practices.
9. Classification of products
Diagram 1: Classification of products
Based on the type of risks for underwriting and exposures, the products are
classified into:
 Class rated products and

 Individual rated products
a) Class rated products
i. Internal tariff rated products
These are standard products that can be sold by any of the offices of the
insurer with the rates, terms and conditions of cover, including choice of
deductible where applicable, as set out in an internal guide tariff. If the
internal guide tariff visualises variations from the listed rates for factors
either linked to experience or based on hazard features or size of sum
insured or size of deductible or to meet competition, such variations should
also be properly documented following the same rules and procedures. In
other words, these are “rule based” underwriting products.

This category will include:
 Fire insurance with certain sum insured or category of risk

limitations,
 Motor insurance other than fleets,
 Personal Accident insurance other than groups,
 Health insurance other than groups,
 Burglary insurance,
 Fidelity insurance and so on
ii. Packaged or Customised Products
These are products specially designed for an individual client or class of

clients, in terms of scope of cover, basis of insurance, deductibles, rates and
terms and conditions of cover. These will include insurance packages like
 Homeowner’s Comprehensive or
 Shopkeeper’s Comprehensive or
 Banker’s Blanket insurance and so on
b) Individual rated products
i. Individual experience rated products
These are products where the rates, terms and conditions of cover are
determined by reference to the requirements of and the actual claims
experience of the insured concerned. These will typically be insurances with
a high frequency but low intensity of loss occurrence. This will include
 Cargo insurance,
 Group insurances for PA or Health,
 Motor fleets,
 Hull insurance and so on
ii. Exposure rated products
These are products where the rates, terms and conditions of cover are
determined by an evaluation of the exposure to loss in respect of the risk
concerned, independent of the actual claims experience of that risk.
Typically, these will be risks where the occurrence of a loss is an uncommon
event or where there are very few risks of that class to develop a
statistically supported rating basis. The exposure rating may derive from
rates for similar risks in other markets or be based on hazard evaluation
done for other reasons such as for risk management. This will include
insurance for
 Earthquake risk,
 Public Liability insurance for high hazard occupancies and so on

iii. Insurances of large risks: For the purpose of these guidelines, large risks
are:
 Insurances for total sum insured of Rs. 2,500 crores or more at one
location for property insurance, material damage and business
interruption combined;
 Rs.100 crores or more per event for liability insurances.
These are typically insurances that are designed for individual large clients
and where the rates, terms and conditions of cover may be determined by
reference to the international markets.
According to the new File & Use guidelines, it is not permissible to place a
product under this category by merely referring to a reinsurer for the rates
and terms. It should genuinely relate to risks that are not within the
underwriting or rating capability of Indian insurers.
It is expected that in respect of such products, the insurer will quote terms
in line with the terms quoted by reinsurers including the extent of cover and
deductibles or claims conditions.
10. Risk Management
Insurance is a form of risk transfer mechanism for dealing with one aspect of
risk, i.e. the transfer of the financial losses caused by the occurrence of
uncertain events / risks.
Risk management consists of 6 steps:
i. Determination of objectives,
ii. Risk identification,
iii. Risk analysis,
iv. Risk assessment and
v. Implementation
Insurance is a mechanism through which the risks can be transferred from

individuals to groups at a defined price called premium. The losses of a few
whenever occur are paid by many, out of the fund collected by way of
premium. In simple terms, insurance spreads the economic burden of losses
throughout the group.
General insurance policies are intangible products which promise to pay losses
that may arise in the event of occurrence of an unforeseen peril. In other
words, the delivery of promise is contingent in nature. The idea of fixing a tariff
is essentially to see that the insurance companies do not charge such low rates
as to be unable to meet the liability when a claim is made.

11. Re-inventing the principles of Underwriting
The purpose of underwriting is to assess the extent to which the risk presented
departs in any respects from normal and if so, to what extent additional hazard
can be mitigated or can be covered and at what rating considerations. The
insurers are expected to be prudent while accepting the risks for underwriting.
Prudent underwriting means that the insurer should only offer insurance of
risks that are quantifiable and manageable and where the premium can be
properly assessed. The cover should be clearly defined and should provide cover
that is of value to the person insured.
12. Corporate Governance
Underwriting being one of the core functions of the insurers, it is essential that
the Board should be involved in deciding the underwriting philosophy of the
company in the matter of the underwriting profit expectation.
The underwriting policy placed before the Board inter alia shall cover:
a) The underwriting philosophy of the company in the matter of the

underwriting profit expectation;
One does not expect any insurer consciously to underwrite business at a loss.
However, a small underwriting profit margin is acceptable in case of a class
of business that does not have a significant exposure to catastrophe losses.
One can also accept an insurer taking credit on a conservative basis for any
investment income in a long tail class of business such as Motor Third Party
liability on a proper and statistically supported basis.
b) The margins that will be built into the rates to cover acquisition costs,
promotional expenses, expenses of management, catastrophe reserve
and profit margin and the credit that will be taken for investment
income in the design of rates, terms and conditions of cover, and how
they will be modified based on the actual operating ratios of the insurer;
c) The delegation of authority to various levels of management for quoting

rates and terms and for underwriting in each of the 5 sub-categories of
products; in particular, the Board should appoint the Appointed Actuary
or Financial Adviser or the Chief Financial Officer or any other top
management executive who does not have any responsibility for business
development, to act as the moderator of rates and terms that are
quoted on individually rated risks that fall under para 19(v) of File & Use
guidelines;

The basic principles governing delegation of authority are as important as

the designations of officers who are given authority.
Firstly, authority should be commensurate with the person’s technical

competence.
Secondly, any decision that can have a significant effect on the company’s
exposure should be taken by consultation among at least two persons with
adequate competence.
Thirdly, a person who is responsible to develop business should also not be

responsible for underwriting without sufficient supervision by persons who
have adequate underwriting knowledge and hold no responsibility for
business development. If the CFO or FA also holds business development
responsibility, obviously, he cannot act as moderator.
d) The role and extent of involvement of the Appointed Actuary in review

of statistics to determine rates, terms and conditions of cover in respect
of internal tariff rated risks and products designed for a class of clients;
The Appointed Actuary can be given a wider than purely mathematical role
in underwriting using the training that an actuary goes through in his studies
in respect of logical thinking rather than his knowledge of the mathematics.
He can play the role of a moderator on the underwriting process in an area
with little statistical support and severe competitive pressure. It has been
agreed that the person moderating the rating of risks in the absence of
statistical data can be the Appointed Actuary or the Chief Financial Officer
or the Financial Adviser of the company
e) The internal audit machinery that will be put in place for ensuring
quality in underwriting and compliance with the corporate underwriting
policy;
Until the insurers get used to working in a disciplined manner in a tariff-free

marketplace, the underwriting audit will be of critical importance to ensure
prudence in underwriting. So, it is important that a robust and independent
underwriting audit system is put in place with an underwriting audit
frequency of once every quarter as far as possible. If insurers decide to use
their existing internal audit machinery also to do technical audit, they
should ensure that the auditors are trained in underwriting and the technical
audit should be a focused audit with high frequency in the early period after
removal of tariffs.

f) The procedure for reporting to the Board on the performance of the

management in underwriting the business, including the forms and
frequency of such reports. The reporting forms must be detailed enough
to highlight any emerging problems at an early stage and enable the
Board of Directors to monitor the profitability and spread of business on
an ongoing basis.
Test Yourself 3
‘Motor insurance other than fleets’ will be classified under which of the below?
I. Internal tariff rated products

II. Packaged of customised products
III. Individual experience rated products
IV. Exposure rated products

CHAPTER 6 SUMMARY
Summary
a) The term 'underwriting' is broadly used to denote the principles and

practices concerning:
i. The acceptance or rejection of the risks,

ii. The fixing of rates,
iii. The total amount of acceptance,
iv. The amount of retention for insurers own account and
v. Treatment of the balance through reinsurance
b) Several factors enter into underwriting and these may be broadly classified
as follows:
i. The production of a well spread and a large volume of business;

ii. The selection of the business;
iii. The determination of the limits to be retained; and
iv. The reinsurance of the surplus
c) The production of a large volume of business is governed by the need for

wide distribution of risks class-wise and geographically.
d) The selection of the business involves careful scrutiny of the business

acceptances with a view to making a proper assessment of the fire hazards
involved.
e) The term "retention" refers to the amount which an insurer is prepared to

retain for own account on a risk; the alternative terms used are "limit" and
"net holding".
f) The individual features in the risks which affect limits may be considered as
follows:
i. Construction and occupancy

ii. The probable effects of any outbreak of fire on the stocks and the
possibilities of salvage
iii. Fire protection
iv. The situation of the risk
g) The term ‘Maximum Probable Loss’ (also known as “Estimated Probable

Loss” – EML) refers to the insurer’s estimate of potential liability in the
worst event.
h) The maximum amount of ‘risk’ (property located in one compound in terms

of sum insured or PML) that can be assumed for the own account of an
insurer, in respect of single ‘risk’ is termed the Net Retention Capacity.

SUMMARY CHAPTER 6
i) PML Assessment Factors: These can be classified into broad categories as

under:
i. Technical information
ii. Insurance Information
iii. Third Party Information
iv. Causes of Loss Information
j) PML error / PML burst generally denotes an actual loss being larger in size
than PML estimates.
k) Reinsurance is an arrangement whereby Direct Insurer who has insured a risk

insures a part of that risk again with another insurer, that is to say,
reinsures a part of the risk in order to reduce his own liability.
l) There are two main methods of reinsurance: Facultative and treaty
m) The main feature of the facultative method is that each risk is reinsured
individually.
n) Under proportional treaties the ceding company decides the part of the
original insurance, it wishes to retain for its own account and cedes the
balance to the reinsurer.
o) Under a quota share treaty, the ceding insurer is bound to cede and the
reinsurer bound to accept a fixed share of every risk coming within the
scope of the treaty.
p) The purpose of surplus treaty is to reinsure the surplus of a risk beyond the
amount of the ceding insurer's retention.
q) CAT Excess of Loss (XoL) cover protects the insurers Net Retained Account
from losses of catastrophe nature e.g. losses caused by weather perils such
as STFI ; natural perils such as EQ and resultant tsunami, landslide bush fire
etc. and political risks such as Riots, SRCC or even conflagration.
r) The ‘burning cost’ is arrived at by taking a fixed period (say 4 years) and
computing the ratio of the claims paid and outstanding for the share of the
excess of loss reinsurers to the gross net premium income of the company
for the period.
s) Types of Excess of Loss covers include ‘per risk’ cover and ‘per event’ cover.
t) AIFT classifies India into four EQ zones with respect to frequency and
severity.

CHAPTER 6 SUMMARY
u) CRESTA's main goal is to establish a uniform and global system to transfer,

electronically, aggregated exposure data for accumulation risk control and
modelling among insurers and reinsurers.
v) The Indian Fire Reinsurance programme is reviewed annually and arranged

by GIC in consultation with its four subsidiary companies and finally
approved by the Government of India. The objective is to maximise
retention within the country in order to save foreign exchange outgo and to
achieve this the following methods are adopted.
w) The key ingredients of general insurance product pricing are:
i. Claims cost;
ii. Business acquisition cost;
iii. Management expenses;
iv. Margin for fluctuation in claims experience and
v. Reasonable profit
x) Based on the type of risks for underwriting and exposures, the products are
classified into:
i. Class rated products: These are further sub-classified as Internal tariff

rated products and packaged or customised products
ii. Individual rated products: These are further sub-classified as Individual
experience rated products and Exposure rated products

Answer 1
The correct answer is III.
The alternative terms used for ‘retention’ are limit and net holding.
Answer 2
In facultative reinsurance, each risk is reinsured individually.
Answer 3
‘Motor insurance other than fleets’ will be classified under ‘internal tariff rated
products’.
Question 1
With regards to burning intensity, ‘metal goods and hardware’ will be classified
under which of the below category?
I. Burn instantly
II. Burn with great intensity
III. Burn moderately
IV. Incombustible or burn very slowly
Question 2
Expand the term ‘EML’.
I. Estimated maximum loss

II. Estimated minimum loss
III. Elaborate maximum loss
IV. Elaborate minimum loss

Question 3
Based on risk profile data and other underwriting information, an estimate of

the CAT – PML for the treaty is arrived at. In hard market conditions, reinsurers
insist on additional control measures / restrictions in the form of:
I. Aggregate Cession Limit

II. Per Event Loss Limit
III. Annual Loss Limit
IV. Any of the above
Answer 1
With regards to burning intensity, ‘metal goods and hardware’ will be classified
under the category of ‘incombustible or burn very slowly’.
Answer 2
EML stands for ‘estimated maximum loss’.
Answer 3
Based on risk profile data and other underwriting information an estimate of the
CAT – PML for the treaty is arrived at. In hard market conditions, reinsurers
insist on additional control measures / restrictions in the form of: Aggregate
Cession Limit, Per Event Loss Limit or Annual Loss Limit.

CHAPTER 7
CLAIMS - LEGAL ASPECTS
Processing and settlement of claims requires sound basic knowledge of general

and special law of contract and its terms, exceptions and conditions of the fire
policy, the extensions of this policy and the special policies and clauses. Also
under common law, insurers have certain powers and rights which correspond to
the duties imposed on the insured viz. to take all reasonable steps to extinguish
the fire, to minimise their loss and to save as much as possible of the property
insured.
In this chapter we will study about the legal aspects of claim, duties of the
insured and rights of insurer. We will also discuss about warranties, ex-gratia
payments and rules of interpretation of policies. At the end of chapter we will
discuss about meaning of value and principle of indemnity.
Learning Outcomes
A. Legal aspects of claims

B. Warranties, ex-gratia payments and rules of interpretation of policies
C. Meaning of value and principle of indemnity

CHAPTER 7 LEGAL ASPECTS OF CLAIMS
A. Legal aspects of claims
1. Processing and settlement of claims
Processing and settlement of claims requires sound basic knowledge of:
a) The general law of contract
b) The special law of contract, that is, principles of common law, as

applicable to fire insurance, viz.,
i. Indemnity,
ii. Subrogation, Contribution
iii. Utmost good faith, Causa Proxima etc.
c) The terms, exceptions and conditions of:
i. The fire policy

ii. The extensions of the policy
iii. The special policies and clauses
Although, losses have to be settled within the framework of the insurance

contract, taking into account its terms and conditions, its limitations and
restrictions, insurers observe utmost good faith and ensure that, as far as
possible, losses are settled according to the spirit of the insurance contract
rather than its letter.
Prompt and fair settlement of losses requires not only knowledge of insurance
law and practice but also personal qualities of patience, tact, diplomacy and
courtesy on the part of claims officials and staff and effective and empathising
internal dispute resolution machinery.
2. Duties of the insured
a) Observe utmost good faith
It is the duty of the Insured to observe good faith not only at the pre-
insurance stage but also during the currency of the policy and especially
after the occurrence of a loss. The Insured has to act “as if uninsured”.
There is a common law duty on either party to a contract to minimise his
own loss. There is no need for an express condition in the policy to provide
for this duty.

LEGAL ASPECTS OF CLAIMS CHAPTER 7
b) Insured must take immediate steps to extinguish the fire
Apart from notifying the fire brigade personnel, the Insured must take
immediate steps to douse the fire to prevent it from spreading and,
wherever practicable to remove the property insured to a place of safety,
and to protect the salvage (scrap) etc.
c) Co-operate with fire brigade personnel
The insured must also co-operate with the fire brigade personnel in their
efforts to put out the fire or limit the damage.
Some examples of these measures are:
i. A building may be so damaged by fire, explosion, cyclone, etc. so as to

render it dangerous to adjacent property, because of weakening of its
structure and therefore, partial demolition or propping up the structure
may be necessary.
ii. Damaged roof may cause further damage to the contents of the building
by rain or otherwise and may have to be covered with tarpaulin or
temporary repairs may have to be executed.
iii. Machinery may have to be removed to a place of safety to prevent

damage due to collapse of upper floors or walls or if already damaged
may be further exposed to damage by rust, or clogging of the machines
by the stock in process. Thus, it is necessary to contain the loss both on
the machinery and the stocks.
iv. Merchandise affected by insured fire perils is also exposed to further

damage and may have to be removed to a place of safety. Perishable
commodities may have to be disposed of before deterioration sets in.
Stocks damaged by water may have to be segregated and dried.
d) The other important duties of the insured are to
i. Give notice of loss to insurers
Notice of loss has to be given forthwith so that insurers are enabled to

determine, through survey or otherwise, the cause of loss, the amount of
loss and to deal with the salvage. Notice has to be followed by a written
claim giving full particulars of the loss. The Insurers furnish a claim form for
the purpose.

ii. Submit proofs and particulars of loss.
This is provided for in policy condition 6 of the fire policy (see chapter 1)
The insured is required to furnish proof of loss, both as regards to cause of

loss and extent of loss at his own expense. The burden of establishing the
proof of the cause of loss, lies on him; so also the burden of proving the
amount of loss. Proofs for the later may be in the form of books of accounts,
sales and purchase records, vouchers, invoices, contractual arrangements
with suppliers or customers (e.g. trade discounts) in connection with
contents claims and for building claims plans, estimates, specifications, etc.
iii. Make a declaration on oath
The insured is required to make a declaration on oath or in other legal form

of the truth of the claim and of any matters connected therewith. This is
rarely insisted on in practice.
iv. No claim under the policy is payable unless the terms of this condition
have been complied with
Finally, it is provided that no claim under the policy is payable unless the
terms and conditions of this have been complied with. This, of course,
applies to the particular claim and the policy as such otherwise remains
valid.
3. Onus of Proof
Definition
Onus of proof (or burden of proof as it is otherwise called refers to the task or
duty imposed on someone to prove that what he has stated or affirmed is true.
Under a fire policy, the onus of proving that the loss was the direct result of fire
is on the insured. It is sufficient if he produces evidence that the property is
actually damaged or destroyed by fire. He is not expected to further prove the
cause of fire, as to how the fire began.
Once this is proved by the insured claimant, then the onus is on the insurers to
prove otherwise, if they so desire to prove that the loss was caused by an
excepted peril. The onus then would once again shift to the insured to prove
that the loss was not caused by the excepted peril or that it arose
independently of the operation of the excepted perils.
Where a breach of condition of the policy is alleged, the onus of proving it is on

the insurers.

4. The Doctrine of Proximate Cause
The essence of the insurance contract is provision of indemnity for financial loss
suffered by the insured as a result of the happening of an event insured against
under the policy.
When the loss arises, the insured has to prove that the loss he has suffered is
the loss provided for in the policy. In the simple straight forward cases, the
occurrence of the peril insured against will be prima facie evidence of that.
Similarly, the insurers have to prove that the loss was caused by an excepted
peril.
There may be complicated situations in which the insured peril is only one of
several events all of which have simultaneously or successively produced the
loss. The liability in such circumstances has to be determined in the light of the
legal maxim of proximate cause- cause proxima non remota spectatur (the
immediate and not the remote cause is to be considered).
a) Definition of Proximate clause
Definition
The classic definition of proximate cause is: “the active efficient cause, that
sets in motion a train of events, which brings about a result, without the
intervention of any force started and working actively from a new and
independent source.”
Every event is the effect of a cause. The cause itself may be the effect of
some other cause preceding it. In fact, there may be a succession of causes
and effects but the law does not look into the several causes of events in
the infinite past; it concerns itself with identifying the dominant, effective
and proximate cause to the exclusion of all other causes which are too
remote.
Therefore, in general, it may be said that if the loss is attributed to the

insured peril as the direct and unavoidable result of that peril so that a
direct causal relationship is established, the insurers are liable for the loss.
But if the loss is the direct and inevitable result of some other event which
has either preceded the insured peril or followed it and is an event which is
not included in the policy or is excepted there under, the insurers are not
liable.

b) Consequential Loss Policy
The fire policy provides for payment of direct losses suffered by the insured
from the damage or destruction by fire or other insured peril of certain
specified property.
The insured may incur several other losses of a consequential nature which
are not intended to be covered, as they are indirect or remote
consequences of the insured peril. Thus, loss of profits, increased cost of
running the business, etc. are losses produced by the conditions created by
fire and not proximately caused by it. However, these losses can be covered
under a separate Consequential Loss Policy.
It is not the intention of the fire policy to cover such losses. To make the
position abundantly clear, the fire policy specifically excludes “loss of
earnings, loss by delay, loss of market or other consequential or indirect loss
or damage of any kind or description whatsoever” (Exclusion 9).
c) The doctrine of proximate cause is invoked to answer two questions

which arise when a loss takes place:
 Was the loss caused by perils insured?

 Was the loss caused by an excepted peril?
i. Insured perils
The peril need not be the immediately preceding cause of the damage; but
it must be established that the loss is connected with the peril by a chain of
events leading naturally and in the ordinary course of events, from one to
the other.
The general rule may be stated as follows:
A loss which is not occasioned by the direct action of fire upon the property
insured is not a loss by “fire” within the meaning of the policy unless it is
proximately caused by fire.
Thus, a peril insured against would produce a prima facie damage when the
actual instrument of destruction is the natural and necessary consequence
of the peril; in other words, apart from the peril the loss could not have
happened.
Thus, the loss may be attributable to smoke arising from the fire or to the
falling of walls in consequence of structural weaknesses resulting from a
fire. These are payable under the policy as they are deemed to be
proximately caused by the fire.

Again a peril insured against would produce a prima facie damage when the
actual instrument of damage is the reasonable and probable consequence of
the insured peril in the ordinary course of events.
Thus, losses incurred by the insured to check the progress of a fire or to save
property are attributable to the fire, provided that the steps taken are
reasonable and bonafide. Property may be damaged by water used for the
purpose of extinguishing the flames; or houses may be blown up by the fire
brigade to prevent the fire from spreading.
In both cases, although the property does not suffer direct damage by fire,
yet the connection between the loss and the existence of fire is so direct
and close that the fire is regarded as the proximate cause of the loss.
Similarly, where the insured removes the property from the building in
which the fire is raging for the purpose of placing the property in safety so
as to minimise the loss, from weather related perils any loss caused to such
property by reason of such removal is considered to be a loss by fire,
although the property may in fact be damaged by rains in the street.
Case Study
In the Johnstone v. West of Scotland, the fire left a wall of the building in such
a dangerous state that in the interest of public safety the local authorities
ordered it to be pulled down. During the work of demolition, the wall fell on an
adjoining building and damaged it. The Court held that the wall which caused
the damage fell in consequence of the weakening of the wall by the fire and
therefore, although the wall was an instrument of damage, the fire was
adjudicated as the proximate cause. The owner of the adjoining building could
recover the loss under his Fire policy.
In the Gaskarth v. Law Union, the wall which was damaged by fire, remained
intact for several days and, thereafter, was blown down during a violent storm,
causing damage to the adjoining property. The Court held that the proximate
cause of the damage done to the adjoining property was not fire but the storm
and the negligence of the owner in not securing it properly to prevent its
causing damage to the adjoining property.
In the former case, the fire still continued to be an actively operating source of
danger (peril), whereas in the latter case, the fire had spent itself and it
required the intervention of a fresh event to produce the loss, but for such
intervention, the loss might not have occurred. There was present in the former
case an inevitableness which was absent from the other.

ii. Excepted perils
The doctrine of proximate cause applies equally to exceptions. If the loss is

proximately caused by an excepted peril, there is no liability under the
policy. Thus, where a bomb was dropped by an enemy aircraft, sets fire to a
warehouse, the loss, though caused by fire, is proximately caused by enemy
action. (General exclusion 2)
5. Rights of Insurers
Under common law, insurers have certain powers and rights which correspond
to the duties imposed on the insured viz. to take all reasonable steps to
extinguish the fire, to minimise their loss and to save as much as possible of the
property insured. It is also important that the insurers should be in a position to
determine the cause of loss and assess the extent of loss.
It is equally important, not only to the insurers themselves but also to the body
of the insuring public that insurers should make a complete investigation both
into the details of the claim and into the circumstances of the fire and this
requires taking over and keeping possession of the salvage as also the premises
until investigation is complete without prejudice to acceptance of liability.
The powers derived from common law are not adequate in this respect and
hence wider powers are reserved for insurers under policy conditions.
Under the Condition 7 of the Fire Policy, the insurers, on the happening of loss,
have certain rights. For example,
a) To enter, take and keep possession of the premises where the loss has
occurred;
b) To take possession of or require to be delivered to them any insured

property on the premises at the time of loss.
c) To deal with such property by removal, sorting, disposal etc.
The exercise of these rights by the insurers may give the impression that a valid
claim is made and all that remains to be done is to fix the amount. Hence, the
condition specifically provides that the exercise of these powers does not
diminish the insurers’ rights under the policy to repudiate liability and that no
claim under the policy shall be payable if the provisions of this condition have
not been complied with.

WARRANTIES, EX-GRATIA PAYMENTS AND RULES OF INTERPRETATION OF POLICIES CHAPTER 7
Finally, the condition provides that the insured has no right to abandon the
property to the insurers whether taken possession of by the insurers or not. The
right of abandonment is recognised in a marine insurance contract where, if the
property is extensively damaged but remains in existence in some form the
insured is entitled to give notice of abandonment of such property to insurers
and claim a constructive total loss.
In fire insurance no such right arises and the position is made clear by this part
of the condition.
If some property is saved fully or partially from damage i.e. salvage, the value
of such salvaged property is deducted from the amount of the claim. Even if
the salvage has no value and a total loss settlement is made, the insured cannot
abandon the salvage; if he does, it could prove to be a liability to the insurers
to dispose it.
Example
Cement damaged by water used in extinguishment process.
The condition is so worded that the right of abandonment does not exist even if
the property or salvage is in the possession of the insurers.
Test Yourself 1
In fire insurance, ‘onus of proof’ that the loss was the direct result of fire rests
with _________________.
I. Insurer
II. Surveying officer
III. Insurance agent
IV. Insured
B. Warranties, ex-gratia payments and rules of interpretation of

policies
1. Warranty
Definition
A warranty is an undertaking by the insured
a) that some particular thing shall or shall not be done or

b) that some condition shall be fulfilled or
c) whereby he affirms or negatives the existence of a particular state of facts

CHAPTER 7 WARRANTIES, EX-GRATIA PAYMENTS AND RULES OF INTERPRETATION OF POLICIES
In non-insurance commercial law contracts a warranty has a different meaning.

It is only a stipulation, breach of which does not go to the root of the contract
but merely gives rise to damages.
Thus, in the law relating to the sale of goods, a warranty that sale is of a
particular quality is merely a stipulation. In insurance law, the warranty is a
condition precedent to contract. The two terms are interchangeable.
Warranties have to be distinguished from representations.
Definition
Representations are statements made orally or in writing before or at the time

of concluding the contract. A representation must be substantially true and
should be made in utmost good faith in insurance contracts.
A misrepresentation will avoid the contract only if it is material. On the other

hand, a warranty has to be strictly complied with.
“A warranty is a condition precedent to the contract and unless it is performed

there is no contract. It is perfectly immaterial for what purpose a warranty is
introduced, but being introduced, the contract does not exist unless it be
literally complied with” (Lord Mansfield in DE Hahn V. Hartley, 1786).
In other words a breach of warranty enables the insurers to avoid a claim

whether or not the breach has caused the loss or aggravated the loss.
Although, insurers are entitled to avoid a claim if there is breach of warranty, a

strict enforcement of the legal position may cause hardship to the insured. In
practice, therefore, insurers will usually waive a breach of warranty if it is
merely of a technical nature and does not contribute to or aggravate the loss.
In such circumstances claims are treated as ‘non-standard’ claims and settled
according to certain guidelines adopted by the Companies.
If the breach of warranty involves extra premium the loss is settled after
collecting such additional premium.
Warranty forms attached to the policy incorporate a condition to the effect that
all warranties apply during the entire currency of the policy. However, when
the policy is renewed, non-compliance with a warranty during a previous policy
period does not prejudice any loss which occurs during the current policy
period.

2. Ex-gratia Payments
Definition
Ex-gratia payments are claims which are paid as a matter of grace where the
loss is outside the scope of the policy or the liability under the policy, in strict
legal terms, is doubtful.
Example
Due to an honest mistake, a certain item of property may not have been
included in the insurance, although the insured’s bonafide intention was to
include such property or that property was insured under the previous policy but
due to oversight, was omitted in the renewed policy, such claim may be
considered as ex gratia claim.
Whenever ex-gratia payments are effected, it is the practice not to pay full
amount of the loss, and that such claims are paid `without precedent’ that is,
such payments do not place the insurer under an obligation to meet similar
claims, in similar circumstances in the future.
Ex-gratia payments are justifiable as they mitigate any possible hardship that
may be caused to the insured if they are not made. Besides, there is legal
sanction for such payments by insurers in the ordinary course of their business.
Example
In the English case Taunton v. Royal Insurance Co. (1864) a vessel Lottee Sleigh
caught fire with the result some gun powder on board exploded breaking a
number of windows of nearby property. Although the fire policy contained the
usual explosion exception the Royal Insurance Company decided to make ex-
gratia payments.
A shareholder named Taunton sought an injunction to restrain the Directors

from making payments, as there was no legal liability to do so.
The court held that the Directors were authorised as a matter of discretion and
for the benefit of the business, under the general discretionary powers vested in
the managers of a trading concern to satisfy these losses, the payments being
similar to expenditure upon an advertisement.
The other features of ex-gratia payments are:
Since the ex gratia claims are outside the scope of the policy and payments are
made without admission of legal liability, subrogation rights do not arise.

CHAPTER 7 WARRANTIES, EX-GRATIA PAYMENTS AND RULES OF INTERPRETATION OF POLICIES
Reinsurance arrangements, whether Treaty or Facultative, usually make

provision that reinsurer will automatically follow the action of the ceding Direct
Insurer. Where co-insurance is involved, the leading insurer consults the co-
insurers before deciding on ex-gratia payment.
3. Without Prejudice
Claims correspondence with the insured relating to a claim is marked ‘Without

Prejudice’. The words have the effect of leaving the question of ultimate
liability under the policy open.
The following action taken by the insurers is without prejudice to their right to
deny liability if they are legally entitled to do so:
a) Issuance of a claim form.

b) Receipt of documents relative to cause of loss or amount of loss.
c) Conducting survey and investigation to determine the cause of loss or
extent of loss etc.
Taking such action, does not mean liability is admitted. Documents which are
marked without prejudice cannot be produced as evidence in Court without the
consent of the party concerned.
4. Rules of Interpretation of Policies
When there is any dispute as to the meaning of words used in a policy, the
courts are guided by the following rules which are known in legal language, as
rules of construction.
a) The most important rule is:
“The intention of the parties to the contract must prevail and the intention
is to be looked for in the policy itself, read as a whole.”
b) The other rules are:
i. If clauses and endorsements are attached to the policy they will override
the printed matter in the body of the policy; typewritten matter will
override printed matter and handwritten will override all other matter.
ii. The words used in the policy are to be given their plain, ordinary and
popular meaning. However, technical terms have to be construed
according to their technical definitions. Again if the words have acquired
special meaning by reason of statutory enactment, judicial decision,
mercantile use etc., such meaning will apply. But all these rules are
overridden if the policy provides its own specific definition.
iii. The ordinary rules of grammar and punctuation will apply.

iv. Whenever there is any ambiguity in the policy or any doubt as to the
meaning and effect of the words used, the courts give the benefit of
doubt to the insured. That is to say, the policy is construed in a manner
which is most favourable to the insured. This is the legal doctrine of
Contra proferentum; its rationale is, the party who has drafted the
insurance contract i.e.; insurer, must suffer, if there is doubt or
ambiguity in the policy.
5. The Amount of Claim Payable
The amount of claim payable under the fire policy is governed by the legal
principle of indemnity and is also subject to the terms and conditions of the
insurance contract.
A contract of fire insurance is a contract of indemnity. The insurers undertake,

by the payment of a sum of money, as nearly as possible, to place the insured in
the same financial position as he was immediately before the fire. The intention
is, as far as is practicable, the insured should neither be better nor worse off as
a result of the operation of an insured peril.
This means that the insurers will pay for:
a) if the property is damaged, the amount of such damage
b) if the property is destroyed, the value of such property, subject to the

limit of sum insured opted or
c) the insurers may, at their option, reinstate or replace such property or

any part thereof subject to sum insured limit
(See operative clause and condition 9 of the Fire policy)
The extent of indemnity is, therefore, subject to two main limitations:
a) Value of the subject matter of the insurance affected. The value is

calculated taking into account the following factors:
i. The value at the time of loss;

ii.The value at the place of loss;
iii.
The real or intrinsic value excluding any sentimental value;
iv.Allowance for depreciation or betterment in terms of usage of the
property;
v. Excluding prospective profit or other consequential and indirect
losses.
b) The sum insured fixation under the policy for the affected item.
Notes: In valued policies properties such as works of art, etc., are valued based
on valuation certificate and stated in the policy. (See chapter 4).

CHAPTER 7 MEANING OF VALUE OF PROPERTY AND PRINCIPLE OF INDEMNITY
Under Reinstatement Value policies, replacement value of new property with

similar specifications is taken into account (See chapter 2) subject to additional
statutory expenses necessarily incurred being covered as stipulated under Local
authorities’ clause and Escalation clause, if any.
Under Fire policies, subject to Contract Price clause, the liability is determined
with reference to the price mentioned in the contract of sale. (See chapter 2).
Test Yourself 2
_____________ are claims which are paid as a matter of grace where the loss is
outside the scope of the policy or the liability under the policy, in strict legal
terms, is doubtful.
I. Warranty payments
II. Ex-gratia payments
III. Endorsement payments
IV. Alteration payments
C. Meaning of value of property and principle of indemnity
It is essential to have a clear conception of the expression ‘value’ of property

from an insurance point of view. The word is not defined in the fire policy but
insurance practice over the years has specified the meaning which is acceptable
to all concerned.
1. Meaning of Value of a Property
Definition
Value of a property may be defined as the worth of anything in terms of

something else for which it can be exchanged either with other goods or in
terms of money.
There are two kinds of value:
a) Value in use and

b) Value in exchange
a) Value in use
Value in use depends upon various benefits the owner derives from the
property by way of income, comfort, pleasure, etc. Value in use is usually
measured by the cost of replacing the property less depreciation. This cost
is usually a matter of opinion.

MEANING OF VALUE OF PROPERTY AND PRINCIPLE OF INDEMNITY CHAPTER 7
b) Value in exchange
Value in exchange is determined by that a buyer will pay for the property or
by that it would cost in terms of money to buy similar property at the same
place and at the price ruling at the time (market value). This value can be
determined fairly easily as a matter of fact, only if there is a buyer and a
seller.
Insurance is concerned with the actual, real or intrinsic value of the property.
The main difficulty is to determine the basis upon which the value of the
subject matter is to be computed.
2. Market value or actual cash value
The term ‘Market Value’ or actual cash value, in insurance practice, has
different meanings in different situations but the objective in all cases is to give
effect to the principle of indemnity in a practical manner.
Example
If raw materials of a manufacturer are destroyed by fire, they may be replaced

by procuring additional raw material from the supplier. The cost of purchase of
such raw material is the value for the purpose of indemnity. This is termed as
Market Value of stocks of raw material.
Example
If machinery is destroyed by fire it may be replaced by buying similar machinery

at that place and at the price ruling at the time of loss. This price, in fact,
becomes the `market value’.
But in practice second-hand machinery of the similar type, make and age is
rarely available and a practical method is adopted to pay the insured the cost of
new machinery of the same type, but to give due effect to the principle of
indemnity an allowance for ‘depreciation’ or ‘betterment’ has to be made in
the cost of replacement.
This becomes the market value of second hand machinery and is covered
subject to inventory and valuation clause.
a) Depreciation
Definition
The term ‘depreciation’ refers to reduction in the value of the machinery due
to usage, deterioration, wear and tear, rust, corrosion, metal fatigue etc.

Note: If the policy is on ‘Replacement Value’ basis, depreciation is not

deducted but an allowance for betterment factor is still taken into account.
It must be noted that depreciation, as understood for insurance purposes, is

different from depreciation allowed by income-tax authorities.
b) Betterment
Definition
The term ‘betterment’ refers to the superior qualities of the replaced

machinery such as increased output, reduced consumption of power, lower
costs of maintenance etc. due to technological progress and new research.
Depreciation and betterment are two sides of the same coin.
The concept of ‘value’ and ‘depreciation’ that have been examined,

theoretically, do not present any difficulties. But, their application to
practical situations involves problems.
Therefore, in practice, the basis adopted by insurers is such as to carry out

the intention of the parties to the contract. The basis adopted must enable
the insured to recover the real value of the property involved in the loss.
Therefore, the insurers attempt to provide a fair indemnity to the insured,
within the framework of the policy terms and conditions,.
3. Principle of indemnity
The principle of indemnity states that “the insured is adequately indemnified if

he is restored to the financial position which he occupied at the time of his loss
in relation to the property”.
The practical applications of indemnity in relation to different classes of

property are discussed below:
a) Buildings
i. The indemnity is provided on the basis of cost of reinstatement or

reconstruction of the building
In case of total destruction of a building it would not be appropriate to

consider market value or sale value of the building, since such value is
determined by numerous extraneous factors such as value of site, location
advantages, etc. while these factors are not considered for the ‘value’ of
the building for insurance purposes. Indeed, some buildings such as schools,
museums, temples and churches do not carry any market value.

Therefore, for buildings, the indemnity is provided on the basis of cost of

reinstatement or reconstruction of the building. This cost is determined with
reference to the cost of labour and materials at the time and place of the
loss including other professional and incidental charges. At the time and
place of loss
The words ‘at the time and place of loss’ are important for insurance
purpose. Any increase in the cost of materials or labour charges subsequent
to the date of loss would not be strictly recoverable under the policy. Nor
are the insurers liable to pay any overtime wages, express Air freight etc,
incurred to expedite the reconstruction so that the insured could resume his
business activity at the earliest.
But if certain extra costs are incurred to reduce the loss or to prevent
aggravation of the loss, the insurers generally consider reimbursement.
Example
Temporary repairs may have to be carried to prevent further damage to the

building and / or its contents.
Such repairs are payable according to circumstances and based on surveyor’s

recommendations within ultimate sum insured limit.
ii. Deduction for depreciation
It has been mentioned that the cost of reconstruction is the basis of

indemnity. But, the new structure may be of better quality construction
than the old one. Therefore, deduction for depreciation is applied:
If a building is fairly new and is suitable for the use made of it, or other
usages, its indemnity is measured by assessing the cost of rebuilding and
deducting there from a lower depreciation. This assumes that the new
structure will not be very much better than the old one because the latter
was newly built and well maintained.
If the building before the fire was in a poor state because of age, use,
exposure to the weather etc., depreciation applicable would be higher. If
the building was in a totally dilapidated state, the indemnity would probably
be confined only to the value of the materials of the structure.
Each case is considered on merits and the surveyors with their experience in
the matter, preferably civil engineers play an important role in the
assessment of loss.

The assessment of partial loss on a building is sometimes more cumbersome

than the assessment of a total loss, because of the disagreements over both,
the extent of the repairs and their costing. If the repairs are minor and do
not involve the replacement of major portions of the structure, such as a
roof, there may not be any deduction for depreciation. If the repairs are
extensive, involving replacements, an allowance for depreciation or
betterment is made.
The factor of depreciation is important in assessment of building losses,

especially if old structures are involved.
iii. Causes of deterioration
The causes of deterioration in building materials are decay, corrosion, metal

fatigue, wear and tear, etc.
 Wood is subject to decay when there is moisture and absence of

sunlight.
 Wood also deteriorates by warping and cracking when exposed to the

direct rays of the sun.
 Iron and steel work are subject to rust damage.
 Deterioration of building materials may also be due to the action of the

natural element such as rain, sunlight, strong winds, etc.
 The usage of the building has also substantial influence on its

deterioration.
Example
If heavy loads are kept in the building, the floor may become badly worn
out.
Vibration caused from the machinery may affect the walls, floor, ceilings or
piping attached to walls and ceilings.
Good maintenance of the building is a positive factor taken into account in

fixing the rates of depreciation.

b) Machinery
If the machinery destroyed is relatively new, the cost of replacement less

depreciation is not difficult to decide. But complications could arise where:
i. The machinery, although old, still performs well for the purpose for
which it was designed.
In this case, indemnity is provision of new machinery which will perform

similar functions, subject to deductions for depreciation and the insured’s
contribution towards betterment.
The machinery destroyed is considered old and out of date in industries
where the rates of obsolescence and technological improvement are
high.
These situations are more difficult. In view of the current trend towards
introduction of new machines by manufacturers, it is difficult to arrive at a
fair basis for valuation and to calculate depreciation. In some cases
machines seriously damaged may fetch no more than the value of the metal
as scrap and the level of settlement determined by the surveyor would come
nearer to the book value.
In either case, fair basis of settlement would be the cost of replacement less
depreciation or betterment.
Partial damage to machinery
Partial damage is easier to deal with. The cost of repair to partial damage is
payable and depreciation is deducted only if the repairs result in any
significant improvement in the repaired machinery.
Where machinery is to be replaced, the insurers are also liable for the cost
of transporting the new machinery to the site and the costs of erection or
installation, if adequate amount is provided in the sum insured. The amount
of depreciation is always difficult to decide for machinery. A great deal of
technical knowledge in the use and operation of different types of
machinery is required on the part of the surveyors to be able to properly
assess depreciation.
Deterioration in machinery
Wear and tear, rust, corrosion and metal fatigue are the common causes of
deterioration in machinery. Some machines have extremely limited life
because new and more efficient machines are continuously available and
this factor of obsolescence increases the rate of depreciation further.

The use to which the machinery is put also influences its depreciation.
Machinery in a corrosive Chemical Plant will have greater wear and tear,
than machinery in a Textile Mill. Machinery which is operated for three
shifts will have greater wear and tear, than the machinery operated for
single shift only.
Electrical Installation
Electrical Installation is subject to greater wear and tear than other plant
and equipment. Heavy machinery is subject to lesser wear and tear than
light and delicate machinery. Wood working machinery, machinery used for
grinding or mixing tends to wear out fast. Boilers, pipes, pumps and similar
items of plant suffer from rusting or corrosion. Machine parts which are
subject to constant stress may develop metal fatigue; used parts held as
spares depreciate heavily; similarly, depreciation on standby machinery is
also heavy.
Age
Age merely provides general guidance in estimating depreciation.
Maintenance
It may be pointed out that depreciation due to wear and tear will vary
according to the degree of care that different owners bestow to their
machinery; thus ‘maintenance’ is as important as ‘age’ in assessing
depreciation.
c) Furniture, Fixtures and Fittings
These may include any of the following:
i. Furniture, tables, chairs, desks, cabinets, safes etc.
ii. Counters, showcases etc.
iii. Mechanical fixtures, scales, lighting fixtures, fans, air conditioning

systems.
iv. Furnishing, draperies, venetian blinds, carpets etc.
v. Typewriters, adding, calculating and other business machines, etc.
These are representative examples only and the list is by no means

exhaustive.

The indemnity in Fire Insurance provided for these classes of property is

replacement cost less depreciation. Damage claims are settled by paying
the cost of repair with an allowance for any betterment.
d) Stock-in-Trade
Definition
The term ‘Stock-in-trade’ refers to the merchandise (articles and

commodities) which are held for sale in retail shops or in wholesale
establishments, factories and also merchandise intended for sale and held in
warehouses and godowns.
Stock-in-trade in the hands of retailer or wholesaler can ordinarily be

replaced, if lost or destroyed. The retailer can buy from the wholesaler and
the wholesaler from the manufacturer.
Thus, market value at the time and place of the loss will provide indemnity.
The basis of settlement would, therefore, be the cost of replacement and
not the price at which they would be sold (as selling price includes an
element of profit).
To the invoice price, is added the cost of transporting the goods to the place
of loss, but credit must be given for any trade or cash discount or other
concessions enjoyed by the insured in the normal course of his business.
e) Manufacturer’s Stocks
The stocks at manufacturers’ premises may consist of:
i. Raw materials;
ii. Stock-in-process; and
iii. Finished goods
Diagram 1: Manufacturers stock
i. Raw Materials
Indemnity is clearly represented by the ‘landed cost’ at which such

materials are available at the place and time of fire; in other words market
price plus costs of transportation up to the site of fire.
ii. Stock-in-process
The basis of settlement would be the:
 ‘Cost of raw materials’ ruling at the time of the loss,
 Consumption of raw materials up to the time of fire,
 All direct costs of processing up to that stage, which include labour,

power, depreciation charges, maintenance expenses on machinery
etc., and
 Indirect costs such as cost of supervisory staff, etc.
Thus, the costs of processes yet to be incurred are excluded. Valuation of

stock-in-process is not an easy task but when the insured employs cost
accountancy methods, then the relevant figures readily and easily available,
will help in arriving at a proper basis for settlement.
iii. Finished Goods
The question of valuation, for indemnity purposes, of finished goods which

are destroyed, whilst they are still upon the manufacturer’s premises, and
whilst they are still the property of the manufacturer, is beset with several
difficulties.
Traditional view
The traditional view holds that the indemnity is represented by the net
manufacturing cost at the time of fire, that is to say, the manufacturer’s ex-
factory price less his net profits. Excise duty, if any, could be added to the
value only at the point of time it becomes applicable. Simply, it means that
the indemnity should be confined to the cost of raw materials and direct and
indirect costs of production, i.e. the cost price to the manufacturer.
This approach is based on the view that since the insured is the
manufacturer, he can manufacture similar goods to replace those destroyed
and, therefore, payment based on cost of production represents adequate
indemnity.
Modern view
The modern view is that the cost of production, which is merely the sum
total of labour, materials and cost of production, does not really indicate
the value of the finished property. What the insured has lost, due to the
fire, is not the labour, materials etc. but the goods produced.

The finished product is an independent marketable commodity with a

distinct value of its own, which to a large extent, no doubt depends upon
the cost of production but, also on other factors such as supply and demand.
Thus, the cost of production is merely one of the important elements (but
not the only one), of the value of the product.
According to this view, cost of production provides only partial indemnity

and that market value would provide real indemnity. Of course, it will have
to be established that the concerned products have an established brand
image and command a ready market without any extra effort and money to
be put in advertising and marketing the product.
Here the manufacturer is deemed to have earned his net profit by

completing the activity of manufacture. But, to a manufacturer who has an
accumulation of products that do not sell well, this basis will not hold good.
Thus, this theory of accrued profit has to be applied very carefully
depending upon the circumstances of each case.
It will be seen, that whatever view is taken, unearned or anticipated or

prospective profits are not included in whatever basis of valuation is taken
in respect of stocks, whether belonging to the retailer, wholesaler or
manufacturer.
f) Contract Price
If insurance of imported goods (and not goods of local manufacture) which

are sold under a contract, which is cancelled either wholly or to the extent
of loss or damage is subject to the contract price clause, the indemnity is
based on Contract price. (See also Chapter 2)
g) Household Goods and Personal Effects
Describes all articles ordinarily and normally found and used in a household.
Household goods include furniture, cooking, utensils, domestic appliances,
television, etc.
The term personal effects would include wearing apparel, books, etc.
In general, it is the accepted practice that if these classes of property are

lost or destroyed, they can be replaced from the market and hence cost of
replacement less deduction for depreciation is an adequate basis of
indemnity.
If such property is damaged, the cost of repairs less deduction for any
betterment that may result from the repairs is the basis of indemnity.
The fixation of indemnity for this class of property presents many difficulties
and it is indeed a delicate task for the surveyor:

i. For one thing the insured may not be able to produce proofs of values in
the form of vouchers, bills, receipts etc.
ii. Secondly, i may not readily accept the levels of depreciation assessed by
the surveyor.
h) Salvage
For the purpose of enforcement of the principle of indemnity `salvage’ has

to be taken into account.
Definition
The term ‘salvage’ means
i. All property covered by insurance which escapes destruction or damage from

the operation of an insured peril.
ii. The residual value of property which is partially damaged. This property may
be reconditioned or sold in order to determine the amount of the loss.
iii. The amount of money received from the sale of the damaged property. In
fact this may be better expressed as “proceeds from the sale of salvage”.
Assessment of loss may be on a `net’ basis or on a `gross’ basis. If the

insured retains the salvage, the loss is indemnified `net’, that is, the gross
agreed amount of loss or damage, less the value of the salvage retained by
the Insured as determined by the Surveyor, usually in agreement with the
insured.
There may be circumstances where the surveyors and the insurers may
decide that it would be more economical and practical for the salvage to be
taken over by the insurers and disposed of. The surveyors themselves with
their wide knowledge of the market may help in identifying customers. The
sale is usually by bids or tenders, salvage being sold to the highest bidder.
In some cases, the sale may be by ‘auction’. Where the insurers take over
the salvage the loss is paid gross, and receipts from the sale of the salvage
remain with the insurers.

Insurers may also take over the salvage if the insured is unwilling to retain it
or unable to dispose it of or insurer wants to investigate the cause of loss
etc. But the insured is not entitled to demand that the insurers shall take
over the salvage nor can he abandon the salvage to the insurers. But in
actual practice, the position depends upon circumstances and mutual
understanding between the parties.
4. Corollaries of Principle of Indemnity
The principle of indemnity has two corollary principles of contribution and

principle of subrogation. The latter principles automatically apply to the
insurance contracts. However, the condition in the fire policy modifies the
application of these principles.
a) Principle of Contribution
Under Common Law, the insured would be entitled to claim the entire
amount of his loss, subject to adequacy of the sum insured from any one
insurer, who would then be entitled under Common Law to collect the
proper contribution from the other insurers who had covered the same
property. This process would naturally involve time and trouble for the
insurer paying the entire loss.
The condition in the fire policy, therefore, provides that the insured shall be
obliged to claim from each insurer his rateable proportion and thus save him
from having to pay the entire loss and collecting the contribution from the
other insurers. In effect, the condition establishes agreement amongst all
interested insurers before settlement of the loss.
Rateable proportion of the policy may be defined as that proportion of the

loss as the sum insured under the policy bears to the total sum insured under
all the policies.
b) Principle of Subrogation
If the insured is able to recover the whole or part of his loss from a third
party responsible for the loss, then to that extent the indemnity payable by
the insurers is reduced. Thus subrogation is implied in all contracts of
indemnity.
Definition
Subrogation means that the insured’s rights of recovery of loss from a third
party responsible for the loss are transferred to the insurers who may
recover the loss from the party concerned.

i. The Common Law right of subrogation accrues to the insurer only after
the insured is indemnified in respect of his loss. The condition in the fire
policy modifies the common law in one respect.
ii. This condition provides that subrogation takes place even before
indemnification by the insurer. This is considered necessary to enable
the insurers to act quickly in proceeding against the third parties, and to
ensure that their rights of recovery against third parties are not barred
by any applicable Law of Limitation.
iii. The condition also provides that the insured shall render necessary and
reasonable assistance to the insurer to recover the loss from any third
party who was responsible for the loss.
iv. Finally, the amount of claim payable is subject to the terms of the policy
viz. pro-rata average condition and `excess’ clause.
Pro-rata Average
If there is under-insurance, the amount of claim is proportionately reduced.

(See condition of the fire policy– chapter 1).
Excess clause
There is a compulsory ‘excess’ of 5% of each and every claim in respect of

losses by Lightning, STFI, Subsidence, Landslide and Rockslide and
Earthquake.
In respect of Architect’s etc. Fees and Debris Removal expenses, the amount
payable is on reimbursement basis of actual fees or expenses, subject to the
limits incorporated in the policy.
Test Yourself 3
How is ‘value in exchange’ measured?
I. It is measured by the cost of replacing the property less depreciation

II. It is measured by what a buyer will pay for the property
III. It is measured by giving an allowance for depreciation that has to be made
in the cost of replacement
IV. It is measured by giving an allowance for `betterment’ that has to be made
in the cost of replacement

SUMMARY CHAPTER 7
Summary
a) Duties of the insured
i. Observe good faith

ii. Insured must take immediate steps to extinguish the fire
iii. Co-operate with fire brigade personnel
b) Under a fire policy, the onus of proving that the loss was the direct result of
fire is on the insured.
c) The essence of the insurance contract is provision of indemnity for financial

loss suffered by the insured as a result of the happening of an event insured
against under the policy.
d) The liability in such circumstances in which the insured peril is only one of
several events all of which have simultaneously or successively produced the
loss has to be determined in the light of the legal maxim of proximate
cause.
e) The classic definition of proximate cause is: “the active efficient cause that
sets in motion a train of events, which brings about a result, without the
intervention of any force started and working actively from a new and
independent source.”
f) A warranty is an undertaking by the insured
i. that some particular thing shall or shall not be done or

ii. that some condition shall be fulfilled or
iii. Whereby he affirms or negatives the existence of a particular state of
facts.
g) Representations are statements made orally or in writing before or at the

time of concluding the contract. A representation must be substantially true
and should be made in utmost good faith.
h) Ex-gratia payments are claims which are paid as a matter of grace where the
loss is outside the scope of the policy or the liability under the policy, in
strict legal terms, is doubtful.
i) Value may be defined as the worth of anything in terms of something else

for which it can be exchanged either in other goods or in money.
j) There are two kinds of value:
i. Value in use and

ii. Value in exchange

CHAPTER 7 SUMMARY
k) Value in use is usually measured by the cost of replacing the property less
depreciation. This cost is usually a matter of opinion.
l) Value in exchange is determined by what a buyer will pay for the property
or by what it would cost to buy similar property at the place and at the
price ruling at the time (market value).
m) The term ‘Market Value’, in insurance practice, has different meanings in

different situations but the objective in all cases is to give effect to the
principle of indemnity in a practical manner.
n) The term ‘depreciation’ refers to the reduction in the value of the

machinery due to usage, deterioration, wear and tear, rust, corrosion, metal
fatigue etc.
o) The term ‘betterment’ refers to the superior qualities of the replaced

machinery such as increased output, reduced consumption of power, lower
costs of maintenance etc.
p) The principle of indemnity simply says that “the insured is adequately

indemnified if he is restored to the financial position which he occupied at
the time of his loss in relation to the property”.
q) The principle of indemnity has two corollary principles
i. Principles of contribution and

ii. Principles of subrogation

Answer 1
In fire insurance, ‘onus of proof’ that the loss was the direct result of fire rests
with insured.
Answer 2
Ex-gratia payments are claims which are paid as a matter of grace where the
loss is outside the scope of the policy or the liability under the policy, in strict
legal terms, is doubtful.
Answer 3
Value in exchange is measured by what a buyer will pay for the property or by
what it would cost to buy similar property at the place and at the price ruling at
the time (market value).
Question 1
_________________ refers to the reduction in the value of the machinery due to

usage, deterioration, wear and tear, rust, corrosion, metal fatigue etc.
I. Salvage value
II. Betterment
III. Depreciation
IV. Deterioration
Question 2
_________________ refers to the superior qualities of the replaced machinery

such as increased output, reduced consumption of power and lower costs of
maintenance.
I. Salvage value
II. Betterment
III. Depreciation
IV. Deterioration

Question 3
Which of the following refers to the merchandise (articles and commodities)

which are held for sale in retail shops or in wholesale establishments, factories?
I. Raw materials
II. Stock-in- process
III. Finished goods
IV. Stock-in-trade
Answer 1
Depreciation refers to the reduction in the value of the machinery due to usage,
deterioration, wear and tear, rust, corrosion, metal fatigue etc.
Answer 2
Betterment refers to the superior qualities of the replaced machinery such as

increased output, reduced consumption of power and lower costs of
maintenance.
Answer 3
Stock-in-trade refers to the merchandise (articles and commodities) which are

held for sale in retail shops or in wholesale establishments, factories.

CHAPTER 8
CLAIMS – PROCEDURAL ASPECTS
In this chapter we will learn about the various procedural aspects related to a
claim.
We will learn about claim verification and registration, appointment of surveyor

and report, discharge voucher and cheque settlement, assessment of loss with
reference to different types of properties and final survey report and its
contents.
Learning Outcomes
A. Procedural aspects related to a claim

CHAPTER 8 PROCEDURAL ASPECTS RELATED TO A CLAIM
A. Procedural aspects related to a claim
1. Verification
On receipt of claim intimation the first step is to verify that:
a) The policy is in force.
b) The perils under which the loss is reported are perils covered under the
policy.
c) The items of properties affected and the location involved are the same
as covered in the policy.
d) The interest involved is the same as referred to in the policy.
2. Registration of a claim and allotment of claim number
After claims verification, the claim is registered and a claim number is allotted.
This number is used in all claims correspondence for easy reference. The claim
register contains the details of:
a) Claim number,
b) Date of loss or damage(fire or other insured peril),
c) Policy number,
d) Name of the Insured,
e) Situation of risk when the loss took place,
f) Sum insured,
g) Estimate of the loss amount and
h) Name of surveyor deputed for the purpose of assessing the loss.
(These columns are required in the claims register as per the Insurance Act
1938.)
3. Claim form
After registration of the claim, a Claim Form is issued to the insured for
completion and return. The claim form elicits the following information:
a) Name of the insured, policy number and address.
b) Date, time, cause and circumstances of the fire or the occurrence of

other insured peril.
c) Details of damaged property.

PROCEDURAL ASPECTS RELATED TO A CLAIM CHAPTER 8
d) Sound value of the property at the time of loss. Where the insurance
consists of several items, a declaration is required of the value of each
item under which the claim is made.
e) Amount claimed after deduction of salvage value
f) Situation and occupancy of the premises in which the loss occurred.
g) Capacity in which the insured claims, whether as owner, mortgagee or

the like.
h) If any other person is interested in the property damaged.
i) If any other insurance is in force upon the property.
If the amount of the loss is small and the claim is simple and straight forward, it
is investigated by an official of the Company and thereafter, processed and
settled on the basis of the claim form and investigation report.
4. Appointment of Surveyor and Loss Assessor
If the loss is known or expected to be large, then licensed independent loss

surveyors and assessors are assigned the job of investigation and report on,
inter alia, the cause and extent of loss.
The Surveyor is furnished with a copy of the claim form, copy of the policy and
other relevant information. In large and serious losses, where time is of
essence, the preliminary surveyor is given only brief details of the cover to
enable him to proceed immediately to the scene of loss to investigate and,
complete information is provided afterwards.
At the same time, it is necessary to advise the reinsurers; the preliminary

details of the loss. This position arises when large losses are involved. The
reinsurance arrangements provide for this intimation where the loss amount
exceeds a certain figure.
The basic duty of the final surveyor is to investigate and report on the cause of
loss, extent of loss, compliance with the terms and conditions of the policy,
etc.

5. Surveyor report
a) Preliminary report
After completing his initial investigation, the surveyor submits a preliminary

report which would indicate briefly:
i. The date of loss;
ii. The location at which the loss occurred and the details of the occupancy
at that time.
iii. The cause of the loss, if ascertainable.
iv. A preliminary estimate of the loss or damage.
v. Any other relevant information.
b) Final report
Thereafter, a final report is submitted giving full details of the adjustment

of the loss and the surveyor’s opinion on the question of liability under the
policy.
This final report is scrutinised along with other documents and, if everything
is in order, a discharge voucher is sent to the insured for his signature and
return, on receipt of which a cheque in settlement is sent.
6. Condition 15: Pro-rata premium for the unexpired period
As per Condition 15 of the Fire Policy, upon the settlement of any loss under the
policy, pro-rata premium for the unexpired period from the date of such loss to
the expiry period of insurance for the amount of such loss shall be payable by
the insured. This additional premium is deducted from the net claim payable
under the policy. Thus, the insurance cover is maintained to the full extent of
the sum insured.
However, in case the insured immediately on occurrence of the loss exercises

his option not to reinstate the sum insured, the sum insured shall stand reduced
by the amount of loss.
7. Discharge voucher and cheque settlement
The discharge voucher is to be signed by all the persons named in the policy as
“The Insured”, and the cheque is drawn in favour of all parties mentioned in the
policy. In practice, the cheque is issued in favour of one insured, if the other
persons named as insured’s, authorise the company to do so.

If the policy contains the ‘Agreed Bank Clause’ discharge given by the Bank is
final and the amount of the claim can be paid directly to the Bank. However,
the claim can be paid to the insured, if the bank named in the policy authorises
the company to do so. Similarly, the fees of the surveyors are reimbursed after
obtaining a receipted voucher from them.
Before the cheque in settlement of the claim is released, the payment is

recorded in the claims register and the claim docket. It is essential that salvage
recoveries, if any, are correctly recorded in the claims register. The payment is
also recorded in the relative policy file.
8. Payment of ‘on account settlements’
In very large losses, the insured desires and the surveyors recommend, payment
of ‘on account settlements’ where the insured has already spent or is in the
course of spending, on repairs, replacement, etc. of damaged property. This
course of action is taken where the liability under the policy is not in doubt and
the preparation of the final survey report will take time for various reasons.
9. Co-insurance
When the insurance is on a co-insurance basis, the surveyor is appointed by the

lead insurer. Each co-insurer is sent a preliminary advice of the claim followed
by a copy of the final survey report which would indicate the apportionment of
the loss among the co-insurers who would send the cheque for their share of the
loss directly to the claimant. Alternatively, the lead insurer would settle the
entire loss and recover the expenses and proportionate shares of the loss from
the co-insurers.
10. Outstanding claims
The claims which are paid will be reflected in the accounts which are prepared
at the time of closing.
a) Known outstanding claims
At the end of the closing of the accounting period, i.e., 31st March, there
will be losses which are intimated to the insurers but not yet settled. It is
necessary that appropriate estimates are placed on these losses so that the
accounts reflect a true and fair position.
b) Incurred but not reported IBNR
In addition to known outstanding claims, there may be losses which have

occurred but not intimated to the insurers until last day. It is equally
necessary that these are estimated and provided for in the accounts.

A certain ad-hoc percentage of the known outstanding claims are provided

for what are called IBNR amount (incurred but not reported). It is possible
that some old claims for which provision was made but is found inadequate,
the insurer provides further amounts as IBNER (incurred but not enough
reported).
11. Surveyor’s duties
The surveyor’s primary duties are given in Rule 13(1) of Insurance Surveyors and
Loss Assessors (Licencing, Professional Requirements and Code of Conduct)
Regulations, 2000 to:
i. investigate into the cause of loss;
ii. ascertain the extent of loss;
iii. advise the insured on loss minimisation measures and protection of

salvage;
iv. advise the insurers on disposal of salvage;
v. submit a detailed report on the above and other aspects relating to the
loss
A surveyor is required to submit his report to insurer as expeditiously as

possible, but not later than 30 days of his appointment, provided that in
exceptional cases, the period can be extended with the consent of the insured
and the insurer.
12. Claim procedure for a general insurance policy
Further as per Rule 9 of Insurance Regulatory and Development Authority

(Protection of Policyholders’ Interests) Regulations, 2002 claim procedure is
notified for general insurance policies.
a) On intimation of any loss where a surveyor has to be appointed for

assessing a loss / claim, it shall be so done within 72 hours of the
receipt of intimation from the insured. The insurer may enforce their
code of commitment for deputing surveyor in prefixed time and
requirement of surveyor should reach the site within further stipulated
time from the time of verbal / in writing / email appointment.
b) Where the insured is unable to furnish all the particulars required by the
surveyor or where the surveyor does not receive the full cooperation of
the insured, the insurer or the surveyor as the case may be, shall inform
in writing the insured about the delay that may result in the assessment
of the claim.

The surveyor shall be subjected to the code of conduct laid down by

the Authority while assessing the loss, and shall communicate his
findings to the insurer within 30 days of his appointment with a copy
of the report being furnished to the insured, if he so desires. Where, in
special circumstances of the case, either due to its special and
complicated nature, the surveyor shall under intimation to the insured,
seek an extension from the insurer for submission of his report.
In no case shall a surveyor take more than six months from the date of
his appointment to furnish his report.
c) If an insurer, on the receipt of a survey report, finds that it is

incomplete in any respect, he shall require the surveyor under intimation
to the insured, to furnish an additional report on certain specific issues
as may be required by the insurer. Such a request may be made by the
insurer within 15 days of the receipt of the original survey report.
Provided that the facility of calling for an additional report by the

insurer shall not be resorted to more than once in the case of a claim
d) The surveyor on receipt of this communication shall furnish an

additional report within three weeks of the date of receipt of
communication from the insurer.
e) On receipt of the survey report or the additional survey report, as the

case may be, an insurer shall within a period of 30 days offer a
settlement of the claim to the insured. If the insurer, for any reasons
to be recorded in writing and communicated to the insured, decides to
reject a claim under the policy, it shall do so within a period of 30 days
from the receipt of the survey report or the additional survey report, as
the case may be.
f) Upon acceptance of an offer of settlement as stated in sub-regulation (5)

by the insured, the payment of the amount due shall be made within 7
days from the date of acceptance of the offer by the insured. In the
cases of delay in the payment, the insurer shall be liable to pay interest
at a rate which is 2% above the bank rate prevalent at the beginning of
the financial year in which the claim is reviewed by it.
Assessment of the physical loss at least on provisional basis has to done on

the first visit itself and an interim report with photos/video should be given
generally within 10 days. The property (ies) damaged must be frozen in this
report. Any addition thereto has to be duly substantiated keeping the
insurers informed.
Details of how the salvage value of affected properties, item wise, tender
details, scrap rates, etc. is to be clearly mentioned .

13. Reinstatement claims
In reinstatement claims, specific confirmation as to verification of the physical

reinstatement of the damaged property has to be given. It is to be confirmed
that physical reinstatement of the affected property has been carried out within
12 months from the date of loss or such extended period duly approved by
Insurer.
Aspects of deduction for improvements are to be confirmed. Merely based on

insured’s request time extension for reinstatement should not be permitted by
the Surveyors. The assessment shall be based on actual repair bills or invoice
evidencing the incurring expenditure. Reinstatement value as on date of loss is
to be compared to check adequacy. The photos of reinstatement are to be cross
referred, with that of the photos depicting the damages.
Interim report, recommending on account payment, if necessary to be released

within a period of 15 days, subject to categorical and logical confirmation by
the Surveyors on admission of liability. In Reinstatement Value Policy definite
minimum liability on market value basis and maximum liability on RIV basis
after taking into consideration depreciation, betterment, salvage, under
insurance and excess should be given without fail.
14. Business interruption claims
In business interruption claims, the surveyor gets into the role of MD of insured
and advises the insured as to: how they can restart the operations quickly, and
can cut down the period of interruption and also reduce the shortage in output
/turnover. Any Business Interruption intimation has to be viewed thoroughly as
to cause of loss, the claim made under Material Damage and whether a business
interruption claim would be triggered under the Policy.
15. Process of Surveying and Loss Assessment be extended
An adequate investigation of the loss is facilitated, if the surveyor follows a

logical and orderly process which may consist of the following steps:
a) A thorough examination of the policy to ascertain the scope of coverage;
b) Inspection of the scene of loss and examination of the property

destroyed or damaged and of undamaged property to determine the
cause of loss and extent of loss, to render advice to the insured to take
loss minimisation measures and to decide on measures to protect
salvage.
c) Examination of books of accounts and other records in the possession of

the insured to arrive at the values of the property insured and the
property destroyed or damaged.

d) Examination of other records or reports covering the occurrence of the

loss (e.g. fire brigade report, Salvage Corps Report, etc.) These reports
may throw light on the time, place or cause of loss.
e) Preparation and submission of preliminary, interim and final reports.
16. Examination of Policies
a) Furnishing copy of policy: The surveyor is provided with copies of

policies before proceeding for survey. In serious or large losses, he may
even proceed immediately to the scene of loss with only brief particulars
of the insurance, because in such cases, time is of the essence. The
copies of the policies are furnished to him subsequently.
b) Examination of policy: The surveyor should thoroughly examine the

policies to ascertain:
i. the scope of coverage,

ii.the property covered,
iii.
the property excluded,
iv.special clauses such as Reinstatement Value Clause, Contract Price
Clause, escalation clause etc. and
v. the warranties applicable
c) Comparison of actual property with property stated in the policy: This

familarisation with the policy particulars in advance helps the surveyor
immediately, on inspection of the scene of loss, to identify the property
and compare it with the description and location stated in the policy.
The description of the property in the policy may be at variance with the
actual character and location of the property, which may, therefore,
amount to misrepresentation or mis-description attracting the provisions
of Condition 1 of the Fire Policy.
17. Inspection of the Scene of Loss
a) Simple and small losses: The surveyor should make an inspection of the
premises involved and the surroundings in which the loss has occurred. In
simple and small losses, the surveyor would inspect the damaged
property or its remains, determine the cause and extent of loss and
submit his report.
b) Large complicated losses: In large losses, the process of inspection will

be elaborate and comprehensive. The first step is to take or recommend
measures directed at minimisation of loss and protection of salvage. For
example, if roofs, walls or windows are damaged by fire, explosion,
storm, etc. it may be necessary to cover over or board up opening in the
roof etc. to protect further damage by rain or it may be necessary to
execute temporary repairs to minimise the loss.

c) Building which is seriously damaged may be unsafe for occupancy or

entry and may pose danger to the adjoining property or street traffic. In
such cases, the municipal authorities order measures to be taken to
safeguard dangerously weakened walls, floors or other parts of the
structure. In such cases, measures for demolition or shoring or propping
up the structure are taken.
d) Stocks: As regards stocks, it is necessary to separate the damaged

merchandise from the undamaged. Undamaged property may have to be
removed to place/s of safety. Wet merchandise requires separation and
drying.
e) Machinery, following fire, explosion, flood, storm or other peril, may be

subject to further damage due to rust, clogging of the machines by the
material in process or breakage from the collapse of upper floors or roof.
Machinery may either have to be removed to a place of safety or covered
with tarpaulin, tar paper or even timber and board structures to prevent
further damage.
Machinery which was operational at the time of loss would be filled with
stock in process and may be further damaged if the operation is stopped
because of clogging of the material is process. In such cases, the stock in
process should be promptly removed from the machines. The greatest
danger to machinery is damage by rust. Wet machines should, therefore, be
cleaned and wiped dry and thereafter, greased to prevent formation of rust.
These are a few examples which illustrate the problems facing the insured
and the surveyor following the occurrence of an insured peril. The nature
and type of loss reduction measures would depend upon the type of property
affected, the nature of the insured peril and a host of other circumstances
surrounding the loss.
18. Cause of loss
a) Examination at early stage: An important purpose of survey is to

determine the cause of loss. A thorough examination at an early stage of
undisturbed salvage/scrap may reveal the real, or indicate the most
probable cause of fire. A detailed examination of the salvage would
involve shifting, sorting, counting, weighment measurement, chemical
and physical tests, etc.
b) Pattern of fire: This examination will also enable the surveyor to

observe the pattern of fire travel and fire spread, rate of fire growth,
degree of burning etc. In some cases, the cause of fire may be easily
determined as defective heating devices, careless handling of hot or
burning materials or electrical short-circuit. If the property is destroyed
or severely burned, the cause and place of origin of fire may not be
ascertainable.

c) Involvement of technical experts: Investigation into the cause of loss

requires common sense, imagination and technical knowledge of building
construction, electrical installation, materials and processes of
manufacture involved. In complicated cases, technical experts may have
to be associated with the conduct of investigation. This is done at the
instance of the surveyor but with the approval of the insurers.
d) In many cases, the cause of loss may be visible and investigation may not
be difficult. The property itself or the environment may provide
unmistakable evidence. Examples are ignition by naked flame, ignition
by hot material / surface, etc. Thus, fires are caused in the singeing
department of textile mills by flames getting out of bounds; fires are
caused by hot molten metal leaking out of furnaces.
e) Combustion: Similarly, it may not be difficult to determine spontaneous

combustion which occurs in certain commodities such as cotton seeds,
oil-cakes etc. Bad storage conditions, existence of humidity and lack of
ventilation result in fermentation and heat which may lead to
combustion. Visual inspection itself may identify the cause. Chemical
analysis may also be conducted to establish that it was slow process of
oxidation.
f) Explosion damage is evidenced by shattered glass, broken or displaced

machinery, splintered timbers and widely scattered debris.
g) Unknown origin: With his experience and expert knowledge, the

surveyor should be able to develop several plausible theories and by
careful sifting of the evidence and through the process of elimination,
arrive at a conclusion. If that is not possible, then inevitably, the
conclusion will be that fire was of unknown origin.
h) Determination of details related to loss: The surveyor should determine

the date, hour, cause of loss and the location at which it occurred.
Besides, the surveyor should ascertain by whom the loss was discovered,
when and how alarm was given, the nature of fire-fighting measures with
special problems encountered by the fire brigade and the features of the
property or the risk that were responsible for the origin of the loss or the
nature and extent of destruction or damage.
i) Features of the property: The last mentioned aspect, namely, the

features of the property that contributed to the occurrence of the loss or
to the nature and size of the loss is important, from the point of view of
avoidance of a recurrence of the loss. It is equally important from an
underwriting point of view also; the information will be useful to the
underwriter in dealing with insurance of similar property in future.
19. Assessment of Loss

a) General process of loss assessment
i. Determination of value of property and amount of loss suffered: One

of the most important functions of survey is to determine the value of
property covered by insurance and the amount of loss that it has
suffered. This value is estimated and fixed, when the property is in
evidence, by inspection and examination. Comparison of known
condition before loss with condition after loss: What remains of the
property and the space it occupied provide some evidence indicative of
value. In many cases the damaged property would be available for
inspection. By comparing its condition after its loss with its known
condition before the loss, an opinion can be formed as to its value
before the loss, the nature and extent of damage and the amount of
loss.
ii. Condition of property: The condition of the property provides some

evidence of its sound value and the amount of loss. Thus, if it is
 a building, its measurement and construction;

 stock, its count, weight and measurement;
 plant or equipment, its character
iii. Records: Another reliable evidence of value is provided by records which

may show quantities, costs, age, history or condition. These records
furnish more or less acceptable basis for fixing value of loss. Financial
records showing inventories, purchases and sales in terms of money, or
quantity records such as stock books, or production levels are fairly
reliable indicators of value.
The process of loss assessment explained in general terms in the preceding

paragraphs may now be discussed with reference to different types of
property.
b) Building
i. Original records: If the building totally destroyed was new, the original
records of the cost of construction may be available from which the cost
of re-construction may be built up. If such records are not available the
cost of re-construction may be estimated from the plans and
specifications, obtained from the architect or the builder.
ii. Simple structures: If such plans are not available, the surveyor will have
to estimate the cost of re-construction based on the measurements of
the area of the building, the height of the building, the materials used in
the structure, etc. The cost of re-construction is then worked out on the
basis of prevailing material and labour costs at the place and on the date
of fire. This approach holds good for simple structures.

iii. Complex buildings: For complex modern buildings, estimates will have
to be prepared by architects and contractors, but the surveyor still
carries the responsibility to examine such estimates both as regards
description of the damage as well as the cost of reinstatement. In any
case, estimates have to be prepared in great detail after a complete
inventory of the damage made in the presence of the insured or his
representative. The estimates should provide details of all
measurements, precise description of materials to be used, labour
charges and supervision costs.
iv. Determination of extent of repairs and their cost: If a building has

been damaged, the surveyor should determine the extent of necessary
repairs and their cost. If the repairs are minor, the surveyor himself may
prepare the estimate; if the repairs are major, the estimates may have
to be prepared by architects or builders.
v. Determination of depreciation: Whether the loss is total or partial,

depreciation or betterment has to be determined.
c) Machinery
i. Determination of loss based on cost of repair: The acquisition cost and

other records will furnish the value of the machinery. The loss on
damaged machines or equipment is determined by the cost of repair
with deduction for betterment. Total losses are agreed according to
replacement cost less depreciation. This method is based on estimate of
the cost of repairs or replacement prepared either by the surveyor or by
outside repairers, manufacturers etc.
If the machinery is simple and the damage is minor, loss assessment is

not difficult. The cost of repairs or replacement of the whole machine or
its components may be easily determined.
ii. Loss assessment for complex machinery: Where the machinery is

complex or damage is extensive, loss assessment procedure becomes
more elaborate. A detailed inventory of the damage to the machines and
their parts taken and manufacturers’ specifications, designs, original
blue prints etc. obtained.
iii. Dismantling of machinery: Detailed photographs may have to be taken.

In some cases, machinery may have to be dismantled to decide on repair
or replacement of parts.
iv. Estimate of repairs: If repairs are possible, a comprehensive estimate of

repairs is obtained from the engineers, repairers or manufacturers.

Many industrial clients maintain their own workshops or machine shops

and would prefer to carry out repairs themselves. In such cases, the loss
assessment takes the form of having the repairs made and checking the
cost.
Here again, precise inventory of the parts affected should be made in

the presence of the insured. Labour charges for repairs and cost of parts
to be replaced should be negotiated and agreed in advance.
v. Depreciation and betterment: As the surveyor has to take into account

factors of depreciation and betterment, the damaged machinery will
have to be carefully examined, to ascertain its precise condition before
the loss. The machinery may be second hand and subjected to bad
maintenance which would affect its market value before the loss.
vi. Complex machinery: In complex machinery, components may have to be

sent for repairs to manufacturers.
 Firstly there is no special problem in indigenous machinery, there

may be problem with imported machinery. It may not be economical
to send the component for repairs abroad.
 Secondly, the suppliers may refuse to repair or even replace the
component and may insist on supplying the entire assembly of the
machine.
 Thirdly, due to obsolescence and change of model, the supplier may
not be in a position to supply the component.
Again, it could happen that the cost of repair or replacement of the

component may be highly disproportionate to the value of the entire
assembly. These are special problems and each case is decided on merits
after obtaining expert opinion.
d) Furniture & Fixtures
Here again the loss assessment is based on replacement cost less

depreciation or cost of repair with deduction for betterment.
e) Household Goods and Personal Effects
In respect of these classes of property, invoices, bills of purchase, etc. are

rarely available. The cost of replacement or repair or reconditioning is
determined by the surveyor by his experience. Certain properties like unique
works of art may be difficult to value and if damaged it is impossible to
restore to its original condition. In such cases expert opinion is obtained and
loss assessed on the basis of negotiation.

f) Stocks and Merchandise
i. Determination of values based on physical indications: The physical

indications like volumetric analysis of the stock, both damaged and
undamaged will help the surveyor to determine the values. A
comprehensive inventory of the salvage according to several varieties of
stock is necessary.
ii. Determination of probable quantities of stock that existed: From the

examination of the salvage and the entire premises and the places of
storage or display the surveyor may be able to determine the probable
quantities of stock that existed prior to the loss.
iii. Totally destroyed stock: If the stock is totally destroyed, then reliance
will have to be placed on books of account and other records and the
values therein become the basis of adjustment.
If the stock, which is totally damaged, is now having a ready market and
is replaceable, the loss is assessed on the basis of cost of replacement
from the supplier or the wholesaler.
iv. Reconditioning: If the stock is damaged but can be reconditioned for

sale, then the basis of settlement will be cost of reconditioning plus any
reduction in its sale price because of the reconditioned nature of the
goods.
When reconditioning is not possible or the insured is willing to retain the

salvage to deal with as he likes, then the loss is assessed on the basis of
the sound value and the amount of damage suffered by the goods.
v. Salvage: If the damaged stock is to be taken over as salvage by the

insurers, then the loss is assessed on the basis of sound value, i.e.
replacement cost from the wholesaler or manufacturer.
Loss assessment of manufacturers’ raw materials broadly follows the

method outlined above.
g) Stock in Process
i. Determination by study of production flow charts, process accounts:

Examination of the salvage and of the premises may not reveal much
about the qualities and quantities of the damaged stock in process. The
quantities, therefore, will have to be determined by a careful study of
the production flow charts, process accounts, etc. spread over a fairly
long period. The results are cross-checked with the process accounts of
the preceding as well as subsequent production sections.

ii. In industries having cost accountancy methods it is easy to determine the

value of the stock in process. After determining the quantity affected, it
is possible to assess the loss based on cost of raw materials consumed up
to the point of loss, and direct costs of production. In simple cases, it is
easy to determine the quantity of the stock in process by ascertaining
how much material is usually retained in the process. Salvage: After
ascertaining the quality and valuation, the value of the salvage, if any, is
determined in consultation with the technical staff of the insured in the
light of which decision may be taken as regards its disposal or otherwise.
iii. Finished goods: In regard to finished goods ready for sale, quantities
destroyed or damaged have to be determined by visual inspection of
salvage, storage space etc. and with reference to production records and
other books of account.
20. Final Survey Report
There is no standardised survey report form and each surveyor uses his own
format for submitting report. However, the final survey report generally
consists of the following items of information:
 Name of the insured,

 Address of the insured,
 Name of the Bank/Financer,
 Interest of a financial institution or other mortgagee
a) Description of the Risk
It is desirable that the following information should be included in the

survey report so that the loss is understood in the correct perspective, the
proposal form and representations prior to acceptance are cross-checked
and decision is taken regarding future acceptance of the risk, risk
improvement etc.
i. Construction: Number of storey’s physical condition, maintenance, etc.
ii. Occupancy: Which part was occupied by the insured, details of other
occupancies? Whether the loss occurred in the other occupancy, etc.
iii. Type of property: tock-in-trade, raw materials, stock-in-process,

finished goods, process of manufacture.
iv. Protection: Hydrants, sprinklers, distance from the fire brigade, water
supply, etc.
v. Exposure: Special vulnerability of the property to fire, explosion, flood,

storm etc.

vi. Character of the neighborhood, previous fire record in the area, general
labour situation.
vii. Previous losses suffered by the insured, whether covered by insurance or

not.
b) Insurable Interest
In the majority of cases, insurable interest is evidenced by sole ownership or

additional interest of a bank or a financial institution. In certain other cases
the surveyor may have to report on:
i. Interest of others through assignment etc.;

ii. Interest of lessee / lessor etc.
c) Circumstances and Cause of Loss
In this section, information is given as to the time, place and cause of loss,
and who discovered the loss and when, who raised the alarm and when it
was reported to the fire brigade and by whom.
The exact cause of loss needs to be given. If the cause is unknown, then the
surveyor will have to give his opinion whether the fire was accidental in
origin.
This section should also include information as to:
i. which part of the premises in which the fire originated,
ii. what immediate measures were taken to extinguish the fire,
iii. when the fire brigade arrived at the scene of loss,
iv. how they fought the fire,
v. what apparatus they used,
vi. what difficulties were experienced,
vii. whether water was available,
viii. how long they took to extinguish the fire, etc.
The surveyor is also expected to give his comments on the spread of fire and
aggravation of loss due to presence of combustible materials, openings in
walls or floors, etc.
To supplement the findings of the surveyor in regard to the cause of loss,

reference is made to the findings of other independent agencies such as:

i. Chemical tests by laboratories (in the case of fire, spontaneous

combustion, etc.)
ii. Meteorological reports (in the case of storm, etc.)
iii. Police report (in the case of riot and strikes etc.) etc.
d) Description of Damage
In this section, the condition of the property separately for each item such
as building, machinery, etc. immediately after the loss is described.
If the building is not totally destroyed, then the extent of damage, that is,
i. character and degree of damage,
ii. whether the building is partly destroyed,
iii. whether any part of the structure is damaged by scorching, smoke or

water or
iv. whether any structural weakness has resulted etc.
Similarly, in case of contents, the condition of the property affected by the

loss is described as damaged by smoke, scorching, water, etc. or
contaminated or melted or stained, etc. Detailed description of the damage
is provided separately for machinery, fixtures and fittings, electrical
installation, stock, etc.
Photographs of the damage are provided in addition to extracts from

statements from police, fire brigade, Salvage Corps, Loss Prevention
Association of India, etc.
e) Loss Minimisation
In this section, measures taken by the insured at the recommendation of the

surveyor or otherwise, to prevent further damage, are described.
i. Buildings: Temporary or permanent repairs to roofs or opening or walls,

emergency shoring or propping up, etc.
ii. Machinery: Removal of clogged material, covering with tarpaulins,

wooden boards etc.
iii. Stocks: Drying, reconditioning, removal to places of safety, etc.

f) Average
If the sum insured under each item of property is adequate, a statement to

that effect is made. If there is under-insurance, then calculation of pro-rata
average is shown. Where the amount of loss is small and the values of the
total property covered are large, the surveyor may consider that it is not
worthwhile to go into valuation of the property for purposes of application
of average. In such cases, the surveyor would make statement that no
valuation of the insured property was made and that it was deemed to be
adequately insured.
g) Breach of Warranty
The surveyor is required to give full details of breach of warranties, breach

of conditions, mis-description of the property, etc. If everything is in order,
the surveyor would report that all warranties etc. are complied with by the
insured.
h) Recovery from Third Parties
If the loss could be attributed to a third party, the surveyor should indicate
the possibilities of recovery from the third party under subrogation
proceedings.
i) Final Assessment of Loss
i. Simple claims: In simple claims, the surveyors would mention here the
amount of loss originally claimed by the insured and the amount now
recommended after discussion and negotiation with the insured. A
reference to the salvage value, if any, is also made and how it is
disposed of is also mentioned.
ii. Complex claims: Where extensive damage is involved with buildings,

machinery, etc. this section would provide detailed information,
 cost of replacement/repair,
 expenses incurred by the insured, in fire extinguishment (e.g. cost of
refills of fire extinguishers),
 the value of salvage,
 under-insurance, if any,
 'excess' clause and
 the net loss suffered by the insured
iii. Debris removal expenses and architect’s fees: Reference is also made
to expenses of debris removal and architect’s fees, if any, under the fire
policy and under its extension. These are actual expenses reimbursed
subject to limits under the policy.

iv. Surveyor’s expenses: The survey fees and other expenses of the
surveyor are indicated separately.
v. Recommendation on issue of cheque: This is followed by a

recommendation to issue the cheque in the name of the insured, joint
names of all the insured’s, the name of the bank or financial institution,
etc.
vi. Surveyor's general observations: The final paragraph is devoted for

surveyor's general observations, recommendations etc.
Note: The preceding notes describe the procedure of assessment of fire

losses. The same basic approach applies to losses caused by other perils
covered under the fire policy. Under ‘add-on’ covers and special policies
(e.g., Reinstatement value, Declaration, etc.,) assessment has also to take
into account, the specific terms, conditions, exclusions, etc., provided
therein.
Test Yourself 1
On intimation of any loss where a surveyor has to be appointed for assessing a

loss / claim, it shall be so done within _________ of the receipt of intimation
from the insured.
I. 24 hours
II. 48 hours
III. 72 hours
IV. 1 week

SUMMARY CHAPTER 8
Summary
a) On receipt of claim intimation, the first step is to verify Policy Coverage.
b) After verification, the claim is registered and a claim number is allotted.
c) After registration of the claim, a claim form is issued to the insured for
completion and return.
d) If the loss is known or expected to be large, then licensed independent loss

surveyors and assessors are assigned the job of investigation and report on,
inter alia, the cause and extent of loss.
e) After completing his initial investigation, the surveyor submits a preliminary

report.
f) Thereafter, a final report is submitted giving full details of the adjustment

of the loss and the surveyor’s opinion on the question of liability under the
policy.
g) As per Condition 15 of the Fire Policy, upon the settlement of any loss under
the policy, pro-rata premium for the unexpired period from the date of such
loss to the expiry period of insurance for the amount of such loss shall be
payable by the insured.
h) The discharge voucher is to be signed by all the persons named in the policy
as “The Insured”, and the cheque is drawn in favour of all parties mentioned
in the policy.
i) The claims which are paid will be reflected in the accounts which are
prepared at the time of closing.
j) The surveyor’s primary duties are given in Rule 13(1) of Insurance Surveyors
and Loss Assessors (Licencing, Professional Requirements and Code of
Conduct) Regulations, 2000.
k) In reinstatement claims, specific confirmation as to verification of the

physical reinstatement of the damaged property has to be given.
l) In business interruption claims the surveyor gets into the role of MD of

insured and advises the insured as to how they can restart the operations
quickly, as to how they can cut down the period of interruption and also
reduce the shortage in output /turnover.
m) In simple and small losses, the surveyor would inspect the damaged property
or its remains, determine the cause and extent of loss and submit his report.

CHAPTER 8 SUMMARY
n) In large complicated losses, the process of inspection will be elaborate and

comprehensive. The first step is to take or recommend measures directed at
minimisation of loss and protection of salvage.
o) A thorough examination at an early stage of undisturbed salvage may reveal

the real, or indicate the most probable cause of fire.
p) One of the most important functions of survey is to determine the value of

property covered by insurance and the amount of loss that it has suffered.
This value is estimated and fixed, when the property is in evidence, by
inspection and examination.
q) There is no standardised final survey report form and each surveyor uses his
own format for submitting report. However, the final survey report
generally consists of the following items of information: Name of the
insured, Address of the insured, Name of the bank, Interest of a financial
institution or other mortgagee.
r) In simple claims, the surveyors would mention here the amount of loss
originally claimed by the insured and the amount now recommended after
discussion and negotiation with the insured.
s) In complex claims, where extensive damage is involved to buildings,

machinery, etc. the section would provide detailed information.

Answer 1
The correct answer is III.
On intimation of any loss where a surveyor has to be appointed for assessing a

loss / claim, it shall be so done within 72 hours of the receipt of intimation from
the insured.
Question 1
In no case shall a surveyor take more than _______ from the date of his
appointment to furnish his report.
I. One month
II. Three months
III. Six months
IV. One year
Question 2
In a claim settlement, in case of delay in the payment, the insurer shall be

liable to pay interest at a rate which is ______ above the bank rate prevalent at
the beginning of the financial year in which the claim is reviewed by it.
I. 5%
II. 4%
III. 3%
IV. 2%
Question 3
If the loss could be attributed to a third party, the surveyor should indicate the
possibilities of recovery from the third party under _________ proceedings.
I. Subrogation
II. Proximate cause
III. Utmost good faith
IV. Insurable interest

Answer 1
In no case shall a surveyor take more than six months from the date of his
appointment to furnish his report.
Answer 2
In a claim settlement, in case of delay in the payment, the insurer shall be

liable to pay interest at a rate which is 2% above the bank rate prevalent at the
beginning of the financial year in which the claim is reviewed by it.
Answer 3
If the loss could be attributed to a third party, the surveyor should indicate the
possibilities of recovery from the third party under subrogation proceedings.

CHAPTER 9
CONSEQUENTIAL LOSS INSURANCE - I
In this chapter we will learn about trading losses which result from stoppage of
business due to a fire. We will look at the features of ‘Consequential Loss
Policy’ like measure of indemnity, indemnity period, sum insured etc.
We will also learn about the components of the policy like operative clause,
proviso, schedule, various definitions, policy conditions and some other clauses.
Learning Outcomes
A. Trading losses
B. Consequential Loss Policy

CHAPTER 9 TRADING LOSSES
A. Trading losses
1. Losses from stoppage of business
Fire insurance is designed to provide protection in respect of loss of or damage

to buildings, machinery, fixtures, goods etc. by fire and or other allied perils. In
other words, fire insurance affords cover for 'material damage'.
However, an indemnity for the material damage does not provide complete
protection to the insured who will also suffer trading losses due to total or
partial stoppage of business. The object of loss of profit insurance (also known
as Consequential Loss Insurance or Business Interruption Insurance) is to make
good some of these losses.
a) Trading losses
The trading losses resulting from stoppage of business may be considered in

three areas:
i. Net profit: This may be broadly described as margin of income over all
the expenses.
ii. Standing charges: These are overhead expenses such as salaries, taxes,
interest, rent etc. which continue to be incurred in spite of the stoppage
of the business.
iii. Increased cost of working: This is the abnormal expenditure incurred by

the insured to maintain the business, as far as possible, at its normal
level, so that the loss under net profit and standing charges is avoided or
at least minimised. Examples of such expenditure are rent for temporary
premises, payment of overtime, hire charges for machinery, sub-
contracting etc.
Whereas the subject matter of fire insurance is material property, the

subject matter of profits insurance is earning capacity of the property. This
distinction between fire insurance and loss of profits insurance is to be
noted.
2. Basis of loss of profit insurance
a) Turnover
Every business is conducted on the principle that the total income should
exceed the total expenditure, so that a profit is earned. If turnover is
stopped or reduced, the profits are affected. Therefore, loss of profits is
determined and measured with reference to reduction in turnover and this is
the basis adopted in Loss of profit insurance.

TRADING LOSSES CHAPTER 9
Definition
Turnover is defined in the Loss of Profit Policy as "the money paid or payable to
the insured for goods sold and delivered and for services rendered in the course
of the business at the premises.
In simple terms, it means 'Sales'.
b) Elements of Turnover
Turnover consists of the following three elements:-
i. Variable charges: These are expenses incurred in producing the goods

(e.g., purchase of raw materials) which vary in amount in direct
proportion to the volume of business transacted.
ii. Standing Charges: These expenses are fixed in amount irrespective of

the volume of business transacted or which cannot be reduced in direct
proportion to any reduction of business (e.g., Taxes, Bank interest,
Salaries to permanent staff, etc.)
iii. Net Profit: This is turnover minus variable and standing charges.
(Note: Standing charges and net profit together constitute the gross
profits of business)
After a fire, if the turnover is reduced, the Variable Expenses may also be
reduced in the same proportion, in which case the insured suffers no loss on
this account. But the Standing Charges are not reduced in the same
proportion and, net profit too will be affected. The effect of this reduction
in turnover on the gross profit is illustrated with following example.
Before Fire After Fire

Rs. Rs.
Turnover 50,00,000 25,00,000
Production Costs 35,00,000 (70%) 17,50,000 (70%)
Standing Charges 10,00,000 (20%) 10,00,000 (40%)
Net Profit 5,00,000 (10%) ---
Net Loss --- 2,50,000
3. The measure of indemnity
Each of the three elements which constitute the turnover bears constant
relationship to the whole which can be expressed as a percentage. Thus in the
example quoted above, variable charges constitute 70% and gross profit (i.e.
standing charges and net profits) 30% of the turnover.

Rate of Gross Profit: The proportion the gross profit bears to the turnover
during a given period (usually the last financial year before the fire) is called
the rate of gross profit. In other words, the rate of gross profit is the normal
earning power of the business expressed as a percentage.
Accordingly, the measure of indemnity is the sum produced by applying the rate
of gross profit to the reduction in turnover during an agreed period following
damage. When the rate of gross profit is applied to the shortage in turnover the
amount of trading loss is ascertained.
In the above example, the rate of gross profit 30% is applied to the reduction in
turnover Rs. 25,00,000/- which produces trading loss of Rs. 7,50,000/- (loss in
gross profit) which is payable under the Policy.
4. Indemnity Period
The Loss of Profit policy provides indemnity in respect of loss of gross profit
during the indemnity period which is selected by the insured. The indemnity
period chosen by the insured may vary from 3 months to 3 years. The choice of
the indemnity period would be mainly influenced by the time that would be
taken for reinstatement of the building, replacement of machinery etc.
Other relevant factors are the nature of the business, alternative facilities
available for carrying on business, time during which business is affected etc. It
is in the interest of the insured to select an indemnity period which is of such
duration that it will represent the longest period during which his business could
be affected following a serious fire.
The ‘indemnity period’ is to be distinguished from the ‘period of insurance’

which is usually a year; the fire must have occurred during the period of
insurance and the indemnity period which commences then may well extend
beyond the expiry date of insurance.
5. The sum insured
The sum insured is to be computed from the insured’s accounts e.g., Trading
and Profit and Loss accounts.
i. The first step is to identify what are the standing charges in the
insured’s business. (These have to be individually specified in the
proposal form as insured standing charges). What is being agreed as a
standing charge has to be decided by the Insured in the context of his
business.

TRADING LOSSES CHAPTER 9
ii. The next step is to ascertain the net profit of the business. The total of
net profit and the amount of insured standing charges is the gross profit,
and is taken as the sum insured under the policy. This figure, which is
based on previous financial year’s accounts, should be adjusted usually
upwards, to reflect the projected future gross profit expected to be
earned.
As the indemnity provided by the consequential loss policy is in respect of

loss of gross profits for the indemnity period, naturally the sum insured
should represent the gross profits of the indemnity period selected subject
to minimum annual gross profit.
i. Where the indemnity period is 12 months or less, the sum insured should
be the annual amount of the gross profit i.e. the annual amount of net
profit and the insured standing charges.
ii. Where the indemnity period is 24 months, the sum insured should
represent twice the annual gross profit.
Example
Examples of standing charges are:
i. Interest on loans, bank overdrafts and debentures, including brokerage on

deposits
ii. Rent, rates and taxes (Tax on profit is included in net profit);
iii. Duties, licences and patent fees;
iv. Director's fees and remuneration;
v. Pensions;
vi. Legal auditing and other professional fees and expenses;
vii. Insurance premiums;
viii. Advertising and publicity expenses;
ix. Conveyance, Stationery, Postage, Telephone, Telex, Telegram,
Teleprinter expenses;
x. Motor car expenses
xi. Research & development expenses (of a regular nature);
xii. Laboratory expenses;
xiii. Office and General Establishment expenses;
xiv. Dividends on preference shares;
xv. Heating and lighting, power charges, water charges, (other than for
manufacturing purposes);
xvi. Depreciation of buildings, machinery, plants, fixtures, fittings, motor
vehicles etc.
xvii. Repairs and renewals chargeable to revenue account.
xviii. Subscriptions to trade associations and Magazines regular donations and
charities

xix. Expenses on guest houses, gardening expenses (factory area and staff
colony);
xx. Salaries to permanent staff including Employees State Insurance
Contributions;
xxi. Provident fund, superannuation, family pension, gratuity, Perquisites
benefits, welfare etc.
xxii. Wages (including Employees State Insurance Contributions) either:
 to all employees, or
 to employees in specified categories viz,____________(to be
enumerated by the insured)____________________or
 at _________________ per annum, or
 to extent of ____________% of the total wages roll
Miscellaneous standing charges not exceeding 5 per cent of the total amount
of the aforesaid insured standing charges.
(Note: The above list is only illustrative and not exhaustive.)
Test Yourself 1
Turnover consists of three elements: variable charges, standing charges and net
profit. ‘Salaries to permanent staff’ will be included under which element?
I. Variable charges
II. Standing charges
III. Net profit
IV. If it is less than 10% of turnover then under variable charges else under
standing charges.

THE CONSEQUENTIAL LOSS POLICY CHAPTER 9
B. The Consequential Loss Policy
Diagram 1: Components of the policy
1. Operative Clause
The Operative Clause of the policy reads as follows:
“That if any building or other property or any part thereof used by the Insured
at the premises for the purpose of the Business is damaged by the perils covered
under the Fire Policy, (destruction or damage so caused being hereinafter
termed 'damage'), and the Business carried on by the Insured at the premises be
in consequence thereof interrupted or interfered with. Then the company will
pay to the insured in respect of each item in the Schedule hereto the amount of
loss resulting from such interruption or interference in accordance with the
Provisions contained therein".
a) Provisions of operative clause
The provisions of this clause may be summarised as follows:
i. Fire or other peril must occur at the Insured's premises;

CHAPTER 9 THE CONSEQUENTIAL LOSS POLICY
ii. Property used for the business of the Insured at the Insured premises
must be destroyed or damaged;
iii. The business must be interrupted or interfered with as a consequence;
iv. The resulting loss is paid in accordance with the provisions of the
specification incorporated in the policy.
v. Reference is also made to the 'Premises' and the 'Business' of Insured.

The insurance relates to the particular business of the Insured at the
insured premises. Thus, the ‘business’ of the insured is required to be
described in the policy and the location of the premises is specified.
The perils covered under Fire Policy have been dealt with in Chapter 1.
(Note: Additional perils, if covered under the Fire Policy may also be
covered under C.L. Policy at extra premium.)
2. Material Damage Proviso
The operative clause is followed by a proviso, which states that the Insured
must maintain a material damage Fire Policy and claim under C. L. Policy will
be paid only if the material damage claim is paid or payable. (This is termed as
‘Material Damage’ proviso).
There are three reasons for the proviso:
a) It dispenses with the need for incorporating all the conditions and
warranties governing the fire hazard in the C.L. Policy. The effect is
that, if any warranty is breached or any condition is not complied with
under the Fire Policy, rendering that cover void, the Consequential Loss
Policy also becomes void.
b) Independent investigation of the origin of fire or other insured peril

under consequential loss policy is rendered unnecessary.
c) The existence of the material damage insurance ensures that the

damaged property will be restored with the amount of loss paid there
under. In the absence of such material damage insurance, the
restoration of the damaged property will be delayed due to lack of
capital and the period of interruption of the business will be prolonged,
which would result in a increased claim outgo under the consequential
loss policy.

The last part of the operative clause provides that the liability of the Company
shall in no case exceed in respect of each item beyond the sum expressed in the
said Schedule to be insured thereon or in the whole the total sum insured
hereby or such other sum or sums as may hereafter be substituted, by
memorandum duly signed by or on behalf of the Company.
3. Schedule
The Schedule provides for incorporation of the particulars of the individual

contract under the following items:
i. The Insured;
ii. The Business;
iii. The Premises;
iv. The Sum Insured;
v. Period of Indemnity;
vi. Period of Insurance;
vii. Perils covered;
viii. Rate;
ix. Premium
It is important to note that the Insured's business must be described in full and
the premises precisely defined by the addresses.
4. Specification
Specification is an important part of the Policy, and provides for:
i. Items insured under the policy and the relative sums insured, e.g. Gross
Profit, Wages, and Auditor’s Fees.
ii. Definitions, and
iii. A formula for ascertaining the liability for any loss
5. Definitions
a) Net profit
This is defined as follows:

The net profit is that remaining after all costs of production and trading and
charges incurred in running the business have been met. Depreciation is
specifically mentioned as a charge to be met before net profit can be
ascertained; this is because of differing treatment of depreciation in
accounts.
Income Tax and Profits are included in net profit under this definition, and
hence they may not be insured as a standing charge. Property tax can be
insured as a standing charge.

"The net trading profit": "The net trading profit (exclusive of all capital
receipts and accretions and all outlay properly chargeable to capital)
resulting from the Business of the Insured at the ‘premises’ after due
provision has been made for all standing and other charges including
depreciation, but before the deduction of any tax chargeable on profits".
Note: The policy is concerned only with net profit resulting from trading. It
is not concerned with profit or loss which may result from other activities,
such as sale of investments, sale of property, or income from such property
or investments. Neither is it concerned with capital expenditure, such as
outlay on new plant or equipment or cars, or buildings, etc.
b) Insured Standing Charges
The Standing Charges covered by the insurance are those specified in the
proposal form and named in the policy, and no other Charges.
c) Gross Profit
This is the net profit, as defined, added to the amount of the insured
standing charges. If the business is in the position that not only is no net
profit being earned, but standing charges also cannot be fully met, out of
the earnings, there is a net trading loss.
In these circumstances it would be incorrect to pay an insured the full

amount of the insured standing charges, for to do so would be to place him
in a better position than if the fire had not occurred. This situation is met by
the provision in the definition that gross profit shall mean:
"If there be no Net Profit the amount of the Insured Standing Charges less
such proportion of the net trading loss as the amount of the Insured Standing
Charges bears to all the Standing Charges of the business".
If all standing charges are named in the policy as insured, then this means
that gross profit is the total amount of those insured standing charges, less
the net trading loss. If all standing charges are not insured, then, as all
standing charges, insured or otherwise, constitute equally a charge on the
income, it is equitable to apportion the net loss over those insured and
those not insured.

Example
Rs.
Turnover 10,00,000
Production Costs (60%) 6,00,000
Standing Charges 5,00,000
Net Trading Loss 1,00,000
Insured Standing Charges 4,00,000

Standing Charges NOT INSURED 1,00,000
Total Standing Charges 5,00,000
Insured Standing Charges Rs. 4,00,000

x Net Trading Loss Rs. 1,00,000
Total Standing Charges Rs. 5,00,000
= Rs. 80,000
The Gross Profit for the purpose of the Policy is Rs. 3,20,000 (Rs. 4,00,000
minus Rs. 80,000).
d) Turnover
The money paid or payable to the insured for goods sold and delivered and
for services rendered in course of the business at the premises. In other
words, it is the Insured's income from trading including services rendered.
e) Indemnity Period
The period beginning with the occurrence of the damage and ending not
later than ......... months thereafter, during which the results of the
business shall be affected in consequence of the damage.
The maximum period stated in the specification is not necessarily the

indemnity period. As soon as the business has ceased to be affected by the
damage, which may be in a much shorter period than the maximum, the
effect on the turnover should be ascertained and the claim is finalised.
f) Rate of Gross Profit
The rate of gross profit is initially defined as that amount which is earned
during the financial year immediately before the date of the damage.
The reason for the use of the rate of gross profit for that period as the basis
is that accounts for a full year will give a fairly clear guide to the real rate
of gross profit, and the accounts for the last completed year of trading are
almost certain to be readily available. It must be clear, however, that the
resulting figure is only to be taken as a guide.
However, with most businesses, either they make progress or they tend to
lose ground. Provision must, therefore, be made to allow adjustments to the
results of the previous completed financial year, so that in the computation
of the loss, it will be possible to arrive, as nearly as may be practicable, at
the rate of gross profit which would have been earned had the fire not
occurred to interrupt the trading.
Such adjustment proviso is bracketed against rate of gross profit, annual

turnover, and standard turnover, which cover all the essential factors in
calculating the loss.
g) Annual Turnover
Annual turnover is the turnover during the twelve months immediately

before the date of the damage.
This, the most recently recorded turnover before the fire occurs to interrupt
the business, is the turnover utilised as the basis (to be adjusted as
necessary) for calculation for average purposes of the insurable amount on
gross profit.
It has been seen that the last completed financial year gives the best basis
for calculation of the rate of gross profit; it is considered that the period of
twelve months immediately before the fire gives the best basis for
calculating the insurable amount on gross profit, because it is most likely to
indicate the trend of turnover which might have been expected to continue,
had the fire not occurred.
h) Standard Turnover
Standard Turnover: The Turnover during that period in the twelve months
immediately before the date of the damage which corresponds with the
actual Indemnity Period.
To which such adjustments shall be made as may be necessary to provide for

ascertaining the trend of the business and for variations in or special
circumstances affecting the business, either before or after the damage or
which would have affected the business had the damage not occurred, so
that the figures thus adjusted shall represent as nearly as may be reasonably
practicable the results which but for the damage would have been obtained
during the relative period after the damage.

Example
This means that if a fire occurs on the 1st January, and the business is affected
during the following three months, January to March, then in ascertaining the
shortage in turnover because of the fire, the figures for those three months will
be compared with January to March in the preceding year. It is understood that
this gives a fair basis of comparison.
If, in either of the three-month periods under consideration, there were

exceptional circumstances which affected or would have affected, the
amount of turnover during the period, then allowance must be made for
those circumstances in order to ascertain more nearly the loss of turnover in
fact caused by the fire. Equally, then, standard turnover must be made
subject to the provisions of the "Adjustment Clause".
6. Adjustment Clause
The "Adjustment Clause", is bracketed against the rate of gross profit, annual
turnover and standard turnover, all of which are the essential factors in
calculating the loss. By means of this clause any adjustment may be made to
the pre-fire figures taken to calculate the loss, if by means of those
adjustments, it is evident that something approaching true indemnity will be
attained. Any figures taken from past experience for calculation of the loss can
be at best a guide only to the figures which would have been produced, had a
fire not occurred. The wording of the clause is examined below:
"As may be necessary"
The business may be on an even course, with little of the unexpected. It may,
therefore, be unnecessary to make any adjustment and both parties to the
contract are satisfied.
"The trend of the business"
i. Upward trend: Figures extracted from the insured's books may show that
the turnover for the twelve months before the fire, the annual turnover,
was greater than the turnover during the last financial year on which the
rate of gross profit is calculated. The difference shows that there was an
upward trend of turnover, up to the time of the fire. If the insured can
show that the upward trend would have continued, or would have
further increased during the indemnity period had the fire not
intervened, then the upward trend will be taken into account in
adjusting the loss.

The majority of healthy businesses will show an upward trend in

turnover, in normal times. An effect of this is that the rate of gross
profit will also tend to increase. With more efficient working of
machines and the introduction of more efficient mass production
methods, it may be found that rate of gross profit has also increased.
ii. Downward trend: The trend may be downward in a declining business,

and this calls for corresponding adjustments. If it were found that the
machine troubles were serious, resulting in waste of material and go-
slow labour tactics resulted in decreased turnover, the rate of gross
profit would be less than in the previous financial year.
A trend, either upward or downward, must therefore, be taken into account

when arriving at the rate of gross profit.
The annual turnover will also require adjustment so that, when calculating the
insurable amount on gross profit for average purpose, the correct figure will be
produced. The standard turnover also has to be similarly adjusted.
7. Variations and Special Circumstances
The problem of trends in business is the type of adjustment most frequently

met. This is doubtless because an indication of the trend of the business is
readily available to the insurers when the figures required by the wording have
been extracted.
Variations in and special circumstances affecting the business are not always so
easily traceable from the accounts. Much more difficulty is, therefore, to be
expected in making adjustments for these features and the co-operation and
goodwill of the insured are essential and meaningful discussions with surveyors
are necessary to make the adjustments for trends.
If a firm has just completed installation of additional improved machinery, and

it can be shown that, but for the fire,
i. Substantially increased turnover would have resulted,
ii. The stocks of raw materials would have been available, and that sale of
the increased quantity of finished goods could have been achieved,
iii. Then, on the assumption of an adequate insurance to cover the greatly

enhanced gross profit anticipated, the company will indemnify the
insured accordingly, by invoking the "adjustments clause" to allow for
the variation from pre-fire trading.

As another example of special circumstances, a business may be considered

which eight months before the fire, had been at a standstill for a month owing
to a strike of their workers. The effect on all past figures taken as a guide in
calculating the loss would probably be substantial.
Example
For example, if the interruption by fire lasted six months, it would be

inaccurate to compare turnover during the six months after the fire with a
"standard turnover" utilising the turnover for the same six months in the
previous year because during that time the business had been operational for
five months only.
It is claimed that by means of the adjustment clause any departure from the
normal can be allowed for, and because of the elasticity thus given to the terms
of the contract, a fair indemnity for the loss sustained is provided subject to the
sum insured being adequate.
Specification - turnover basis
Sum Insured
Item no. 1 on gross profit Rs. _________
Item no. 2 Rs. _________
Item no. 3 Rs. _________
The insurance under item No.1 is limited to loss of Gross Profit due to
REDUCTION IN TURNOVER &INCREASE IN COST OF WORKING and the amount
payable as Indemnity there under shall be:
a) In respect of Reduction in Turnover: The sum produced by applying the

Rate of Gross Profit to the amount by which the Turnover during the
Indemnity Period shall in consequence of the Damage fall short of the
Standard Turnover.
In respect of Increase in Cost of Working: The additional expenditure (Subject

to the provisions of Memo 2) necessarily and reasonably incurred for the sole
purpose of avoiding or diminishing the reduction in turnover which, but for that
expenditure would have taken place during the indemnity period in
consequence of the damage, but not exceeding the sum produced by applying
the rate of Gross Profit to the amount of the reduction thereby avoided, less
any sum saved during the Indemnity Period in respect of such of the Insured
Standing Charges as may cease or be reduced in consequence of the Damage.
Provided that if the Sum Insured by this item be less than the sum produced by
applying the rate of Gross Profit to the Annual Turnover, the amount payable
shall be proportionately reduced.

8. Departmental Clause
"If the business be conducted in different departments, the independent trading

results of which are ascertainable, the provision of clauses (a) & (b) of item 1
shall apply separately to each department affected by the damage except that
if the sum Insured by the said item be less than the aggregate of the Sum
produced by applying the rate of gross profit for each department of the
business (whether affected by the damage or not) to the relative Annual
Turnover thereof, the amount payable shall be proportionately reduced".
Memo 1 If during the Indemnity Period goods shall be sold or services shall be
rendered elsewhere than at the premises for the benefit of the
business either by the insured or by others on his behalf the money
paid or payable in respect of such sales or services shall be brought
into account in arriving at the Turnover during the Indemnity Period.
Memo 2 If any Standing Charges of the business be not insured by this policy
then in computing the amount recoverable hereunder as increase in
cost of Working that proportion only of the additional expenditure
shall be brought into account which the sum of the Net Profit and
the Insured Standing Charges bears to the sum of the Net Profit and
all the Standing Charges.
Memo 3 If the Insured declares at the latest 12 months after the expiry of any
period of insurance that the gross profit earned (or a proportionately
increased multiple thereof where the indemnity period exceeds 12
months) during the accounting period of 12 months most nearly
concurrent with any period of insurance as certified by the Insured's
Auditors, was less than the Sum Insured thereon, a pro-rata return of
premium not exceeding 50% of the premium paid on such Insured for
such period of insurance shall be made in respect of the difference.
If declaration not received no refund shall be admissible.
If any damage has occurred giving rise to a claim under this policy, such return
shall be made in respect only of said damage in case the insured has opted not
to reinstate the Sum Insured.
The above formula provides for a method of claim computation. The following
figures and percentages have to be ascertained in sequence.
a) The rate of gross profit based on turnover and gross profit figures of the
last audited financial accounts.
b) Actual turnover during the Indemnity Period is deducted from the

Standard Turnover to arrive at the reduction in turnover.
c) The rate of gross profit is applied on the reduction. This is the amount of
claim payable under (a) above.

d)
 The additional expenditure incurred to avoid or diminish reduction in
turnover.
 The turnover maintained because of the additional expenditure and
the gross profit earned thereon.
e) The additional expenditure is subject to two adjustments:
 According to memo 2, if any standing charges are not insured, then

that proportion only of the additional expenditure which the sum of
the Net Profit and insured Standing Charges bears to the sum of Net
Profit and all Standing Charges shall be payable.
 The additional expenditure cannot exceed the sum produced by

applying the rate of Gross Profit to the amount of reduction in
turnover avoided. In other words, additional expenditure cannot
exceed the gross profit earned by it. This is known as the 'economic
limit'.
f) The amount of insured standing charges which are not incurred during
the Indemnity Period because of the damage. (Savings in Insured
standing charges)
g) The amount of claim payable is c) +e) – f).
h) The rate of Gross Profit is applied to the Annual Turnover to determine

the insurable amount. If the sum insured under the policy is less than
the insurable amount, the claim amount arrived at in (g) above is
proportionately reduced as per condition of average to offset impact of
under-insurance.
(Note: The rate of Gross Profit, Standard Turnover and Annual Turnover may be
subject to such adjustments as may be necessary.)
How the claim amount is computed will be clear from the following two
illustrations.

Example 1
Rs.
Gross profit insured for 3,00,000
Period of indemnity 12 months
Standard turnover 10,00,000
Turnover during the period of interruption 4,00,000
Increased cost of working 70,000
Reduction in turnover saved by above cost 3,00,000
Gross Profit during the previous financial year 3,00,000
Turnover during the previous financial year 12,00,000
Annual Turnover 16,00,000
Reduction in Turnover
Step 1: The rate of gross profit is ascertained
3,00,000 x 100 = 25%

12,00,000
Step 2: The shortage in turnover is ascertained.
10,00,000 - 4,00,000
6,00,000
Step 3: The rate of gross profit is applied to the fall in turnover.

25% of 6,00,000 = 1,50,000 (Amount payable).
Increase in Cost of Working
Step 4: The rate of gross profit is applied to the amount of reduction of

turnover avoided due to additional expenditure (25% of 3,00,000 = 75,000).
The expenditure of 70,000 which is less than Rs. 75,000 is, therefore, payable.
Step 5: The total amount payable in respect of reduction in turnover and

increase in cost of working is 1,50,000 plus 70,000 i.e. 2,20,000
Step 6: The adequacy of sum insured is determined by applying the rate of gross
profit to the annual turnover.
25% of 16,00,000 = 4,00,000
The sum insured is 3,00,000 as against the insurable amount of 4,00,000.

The amount payable therefore is,
3,00,000 x 2,20,000 = 1,65,000

4,00,000
Note: It is assumed that all standing charges were insured. Hence, under
insurance and "average" which is applicable to such charges separately have not
been included. Similarly, it is assumed that no standing charges were saved as a
result of the damage.
Example 2
1. Policy Period from 1.4.93 to 31.3.94
2. Sum insured Rs. 80,000
3. Indemnity Period: 6 months
4. Date of Loss: 1.1.1994
5. Period of Interruption: 1.1.1994 to 30.4.1994 (4 months)
6. Accounts for the financial year ended 31.3.93 show:
a) Net Profit: Rs. 25,000 (inclusive of non-trading income of Rs. 5,000/-)
b) Standing Charges: Rs. 1,00,000 (including uninsured charges of

Rs.20,000)
c) Turnover Rs. 4,00,000/-
7.
a) Turnover for period 1.1.94 to 30.4.94 = Rs. 50,000/-
b) Out of this, turnover of Rs. 20,000 was received from other premises
hired for the period of interruption @ rent of Rs.900/- per month.
8. Turnover – period 1.1.93 to 30.4.93 – Rs. 1,10,000 (standard turnover)
9. Savings in Insured Standing Charges during Period of Interruption – Rs. 900/-.
10. Annual Turnover (i.e. for 12 months backwards from 1.1.94 i.e. date of loss)
Rs. 4,80,000.

Adjustment of loss
Net Profit Rs. 25,000

Deduct Non-trading Income Rs. 5,000
Rs. 20,000 (See definition of Net
Profit)
Standing charges Rs. 1,00,000

Deduct Uninsured Standing Charges Rs. 20,000
Rs. 80,000
Net profit Rs. 20,000

Plus insured standing charges Rs. 80,000
Gross profit Rs. 1,00,000 (See definition of
Gross Profit)
Rate of gross profit Gross profit
x 100
Turnover
1,00,000 x 100
4,00,000
= 25%
Reduction in Turnover
Standard Turnover Rs. 1,10,000
Minus Turnover during interruption Rs. 50,000
period
Rs. 60,000
Loss of Gross Profit due to reduction = Rs. 1 5,000 (A)
in Turnover 25% of 60,000
Increase in Cost of Working Rs. 900 x 4 = Rs. 3,600/-
Since all standing charges are not insured, increased cost payable is worked out
as per Memo 2
NetProfit + Insured Standing Charges x Increased cost

NetProfit All Standings
1,00,000 x 3600 = 3000 (B)

1,20,000
The amount payable as increased cost of working cannot exceed the gross profit
earned on the turnover maintained by additional expenses.
Turnover maintained is Rs. 20,000 by expenses of Rs. 3,000.
Gross Profit earned 25% of Rs. 20,000 = Rs. 5000.

Increased cost of Rs. 3,000 is less than gross profit earned Rs.5,000; hence
payable.
The computation of claim will be
Loss of Gross Profit (A) Rs. 15,000

Increased Cost of Working (B) Rs. 3,000
Rs. 18,000
Less Savings in insured standing Rs. 900
charges during Interruption Period Rs. 17,100
Application of average
Annual turnover Rs. 4,80,000

Gross profit on annual turnover 25% of Rs. 4,80,000
= Rs. 1,20,000
This is the insurable sum insured,
whereas actual sum insured is Rs.
80,000.
There is under-insurance and hence Rs. 80,000 x 17,100 = Rs. 11,400
average is applied. Rs. 1,20,000
The assessed claim is Rs. 11,400
9. Departmental Clause
If the business is conducted in separate Divisions or Departments, (for example

a Company may have four divisions of brewery, wines and spirits, mineral and
soda and bottling) and the trading results of each division are separately
maintained, then the loss can be calculated, as per the specification, separately
for each department affected by the damage.
But average is applied if the sum insured is less than the aggregate of the sum
produced by applying the rate of gross for each department of the business
(whether affected by the damage or not) to the relative annual turnover
thereof.
10. Returns of Premium (Memo 3)
If the Gross Profit earned (or a proportionately increased multiple thereof, if

the Indemnity Period exceeds 12 months) during the accounting period of 12
months most nearly concurrent with the period of insurance is less than the sum
insured a pro-rata return of premium is made in respect of the difference.
The refund is subject to a maximum of 50%of the premium paid and to

declaration of figures, as certified by the insured's auditors within 12 months
after the expiry of the policy.

If any damage has occurred giving rise to a claim, such returns is made in
respect only of said damage in case the insured has opted not to reinstate the
sum insured.
11. Policy Conditions
The policy ceases if;
a) the business be wound up or carried on by a liquidator or receiver or

permanently discontinued or;
b) the insured's interest ceases otherwise than by death or,
c) any alteration is made in the business or premises whereby the risk of

damage is increased unless the insurance is continued by endorsement by
insurers (Condition 1)
These circumstances constitute material alterations. Notice shall be given to

the Company of alteration in or deletion or addition of existing blocks/premises,
so that necessary adjustments are made in the basic rate and the premium
under the policy.
Notice shall be given to the company and if required, an additional premium

paid, if the rate of premium payable under the policy is increased (Condition 2)
On the happening of any event which may give rise to a claim the insured shall;
a) give notice forthwith
b) take measures to avoid or minimise loss (This is known as 'due diligence'

and is relevant to increased cost of working which is payable under the
policy)
c) not later than thirty days after the expiry of the period of indemnity (or
any extension of time allowed by the Company) deliver at his expense
written statement of the claim with details of other insurances, if any,
documentary evidence such as business books, vouchers, invoices
balance sheets etc.
d) furnish at his expense documentary evidence such as business books,

vouchers, invoices, balance sheets etc. to enable to investigate or verify
the claim. This has to be supported by declaration in legal in legal form
of the truth of the claim
No claim is payable or any 'on-account' payment shall be paid, if the terms of

this condition are not complied with (Condition 3)

The company shall not be liable for any claim after the expiry of
a) One year from the end of the period of indemnity, or if later,
b) Three months from the date on which payments shall have been made or
liability admitted under the material damage policy, unless the claim is
the subject of pending action or arbitration (Condition 4)
This is the limitation condition. The time limit to enforce the claim is one year
from the end of the indemnity period. There is a further time limit of 3 months
from the date material damage claim is settled or liability admitted. The latter
limit is provided because the processing of the claim under the fire policy may
extend beyond one year from the end of the indemnity period.
Condition 5 provides that the policy and the schedule shall be read together as
one contract and Condition 6 excludes war and kindred perils.
Condition 7 provides for automatic reinstatement of the sum insured, after a

loss by deducting from the claim amount, pro-rata premium from the date of
loss to the date of expiry of the policy.
However, if the insured exercises his option not to reinstate, the sum insured
will stand reduced by the amount of the loss (This is similar to condition in the
Fire Policy).
12. Losses Not Payable
It is important to note the type of consequential losses which are not covered
under the policy. These are:
a) Under-insurance against property damage under fire policies.
b) The difference between value of stock at the time of the fire and value
at the time of subsequent replacement.
c) Depreciation of undamaged stock after a fire.
d) Cost of preparation of fire and consequential loss claims. (Accountant's

fees for extracting and certifying particulars of profits claims may be
insured as a special item, in a consequential loss policy at additional
premium – Auditors Fees Clause).
e) Litigation costs connected with fire or Consequential loss claims

generally.
f) Third Party claims.
g) Failure to recover book debts owing to destruction of records.

h) Loss of goodwill.
i) Fines and Penalties payable due to delayed fulfillment or cancellation of

sale/service contract.
j) Loss of Market
13. Business Interruption (FLOP):The following minimum deductibles are

applicable
Other than Petrochemical Risks 7 days of Gross Profit

Petrochemical risks 14 days of Gross Profit
Test Yourself 2
Examine the components of a ‘consequential loss policy’ and identify the

section within which ‘various definitions’ related to the policy will be included.
I. Operative clause
II. Proviso
III. Schedule
IV. Specification

SUMMARY CHAPTER 9
Summary
a) Fire insurance affords cover for 'material damage'. The object of loss of
profits insurance is to make good some of trading losses suffered due to
total or partial stoppage of business due to a fire.
b) The trading losses which result from stoppage of business may be considered
under three headings:
i. Net profit
ii. Standing charges
iii. Increased cost of working
c) Loss of profits is determined and measured with reference to reduction in

turnover and this is the basis adopted in profits insurance.
d) Turnover consists of following three elements:
i. Variable charges
ii. Standing charges
iii. Net profit
e) The measure of indemnity is the sum produced by applying the rate of gross
profit to the reduction in turnover during an agreed period following
damage.
f) The indemnity period chosen by the insured may vary from 3 months to 3
years.
g) The sum insured is to be computed from the insured’s accounts e.g., Trading
and Profit and Loss accounts.
h) The proviso clause says that the Insured must maintain a material damage
fire policy and claim under C. L. Policy will be paid only if the material
damage claim is paid or payable.
i) The Schedule provides for incorporation of the particulars of the individual

contract.
j) Specification is an important part of the Policy, and provides for definitions,

formula for ascertaining the liability for any loss etc.
k) The "Adjustment Clause", is bracketed against the rate of gross profit,

annual turnover and standard turnover, all of which are the essential factors
in calculating the loss.

CHAPTER 9 SUMMARY
l) As per the ‘departmental clause’, if the business is conducted in separate

divisions or departments, and the trading results of each division are
separately maintained, then the loss can be calculated, as per the
specification, separately for each department affected by the damage.
m) Notice shall be given to the company and if required, an additional premium

paid, if the rate of premium payable under the policy is increased
(Condition 2)
n) No claim is payable or any 'on-account' payment shall be paid, if the terms

of this condition are not complied with (Condition 3)
o) Condition 5 provides that the policy and the schedule shall be read together
as one contract and Condition 6 excludes war and kindred perils.

Answer 1
The correct answer is II.
‘Salaries to permanent staff’ will be included under standing charges.
Answer 2
Various definitions related to the policy will be included in the ‘specification’

section.
Question 1
Which of the below statement is correct?
I. The subject matter of profits insurance is material property and the subject
matter of fire insurance is earning capacity of the property.
II. The subject matter of fire insurance and profit insurance is material
property.
III. The subject matter of fire insurance and profit insurance is the earning
capacity of the property.
IV. The subject matter of fire insurance is material property and the subject
matter of profits insurance is earning capacity of the property.
Question 2
‘No claim is payable or any 'on-account' payment shall be paid, if the terms of
this condition are not complied with’.
The above statement is true with regards to which ‘condition’ in the policy?
I. Condition 1
II. Condition 2
III. Condition 3
IV. Condition 4

Question 3
___________ provides that the policy and the schedule shall be read together as
one contract.
I. Condition 4
II. Condition 5
III. Condition 6
IV. Condition 7
Answer 1
The subject matter of fire insurance is material property and the subject matter
of profits insurance is earning capacity of the property.
Answer 2
‘No claim is payable or any 'on-account' payment shall be paid, if the terms of
this condition are not complied with’.
The above statement is true with regards to ‘Condition 3’ in the policy.
Answer 3
Condition 5 provides that the policy and the schedule shall be read together as
one contract.

CHAPTER 10
CONSEQUENTIAL LOSS INSURANCE – II
In this chapter we will study further (in continuation to Chapter 9) about

consequential loss insurance. In this chapter we will study about C. L. policy,
wage insurance, lay off compensation and insurance of Auditor’s fees.
We will also learn about gross profit specifications: Output basis of specification
and Difference basis of specification. Towards the end of the chapter we will
discuss about the duties of the insured and claims procedure to be followed by
insurance companies.
Learning Outcomes
A. Consequential Loss Insurance Policy

B. Wage insurance, Lay off compensation and Auditor’s fees
C. Gross profit specification
D. Claims procedure

CHAPTER 10 CONSEQUENTIAL LOSS INSURANCE POLICY
A. Consequential Loss Insurance Policy
The rate of premium for C.L. policy consists of two components:
 Basis rate and

 Percentage for the Indemnity Period
In the system of rating the basis adopted is 1.25 times the full average fire rate
on the contents of the process blocks of the premises, which reflect material
hazards considered from the view point of fire insurance.
Secondly, variation is made for the degree of interruption hazard and this may
be reflected in the length of the maximum indemnity period selected by the
insured.
1. Basis Rate
The basis rate for consequential loss resulting from material damage caused by
the perils covered under fire policy shall not be less than 1.25 times the full
‘Average Fire Rate’ of the items covering the contents of the process blocks of
the premises occupied by the insured for the purpose of business to which the
insurance applies except where otherwise provided. (Example: risks rateable
under Petrochemical Tariff)
a) In calculating basis rate the contents of any storage / utility blocks even
if they are communicating with process blocks should not be taken into
consideration.
b) Pilot plants and laboratories are to be taken as process blocks for rating
purpose.
For other business premises where no manufacturing process is carried on, the
basis rate shall be 1.25 times the average fire rate of the contents of the whole
premises.
The average fire rate shall be the percentage of the aggregate net premium in
respect of the whole of the annual standard fire and special perils insurance of
contents of Process Blocks and / or the whole premises as applicable under sub-
paragraphs (a) and (b) above, bears to the aggregate sums insured on such
contents.
Where discounts are allowed off the fire rate, example, for fire extinguishing
appliances the net fire premium is brought into the calculation of the average
fire rate.
The basis rate is not altered when the factory becomes silent during the policy
period.

CONSEQUENTIAL LOSS INSURANCE POLICY CHAPTER 10
Note: The basis rate for Business Interruption Section under Industrial Risks
Policy shall also be computed as above, with a discount of 10%. (See chapter 11)
2. C.L. Rate
The rate for annual insurance shall not be less than the following percentages of
the basis rate.
Period of Sum to be Percentage of Basis Rates Tea

Indemnity insured Factories
Continuous Other than
Process Continuous
Plant Process
(excluding Plant
Petro-
Chemical
Risks)
6 months or less Equivalent of 93.75 75 56.25
Annual Gross
Profit
9 months Do 112.5 90 67.5
12 months Do 125 100 75
15 months One and quarter 121.875 97.5 73.125
times the
Annual Gross
Profit
18 months One and a half 118.75 95 71.25
times the
Annual Gross
Profit
24 months Twice the 112.5 90 67.5
Annual Gross
Profit
30 months Two and a half 106.25 85 63.75
times the
Annual Gross
Profit
36 months Thrice the 100 80 60
Annual Gross
Profit

Following plants carry out continuous, automatic or semi-automatic processes:
a) Battery Service Stations
b) Breweries
c) Cement Factories
d) Chemical Manufacturers: All factories not automatic or semi-automatic

and continuous
e) Detergent Factories
f) Distilleries
g) Electric Power Works
h) Electric Sub-Stations
i) Electroplating works
j) Engine, Boiler and Pump Houses
k) Glass Factories
l) Ice Candy and Ice Cream Manufacturing premises
m) Ice Factories
n) Ink Factories (excluding printing ink manufacture)
o) Manmade Fibre Manufacturing Factories
p) Paper and Card Board Mills
q) Plastic Raw Material Manufacturers
r) Sugar Factories
s) Tile, Pottery and Brick Works
t) Vegetable Oil Solvent Extraction Plants
u) Vegetable Ghee Factories
v) Wireless Transmitting Stations

CONSEQUENTIAL LOSS INSURANCE POLICY CHAPTER 10
Note: The above list should not be considered as exhaustive. In case of doubt as
to whether a plant is carrying on continuous process or not, reference must be
made to the Regional Committee through Head Office.
The percentages for the shorter indemnity periods are proportionately much
higher than for the longer periods. The extent of interruption during the early
months following fire is likely to be far greater than during the later months,
when the efforts being made to minimise the interruption are having their
effect.
If there is extensive interruption, there may be savings in standing charges

which may not be possible for shorter interruption. It is the general expectation
that loss of gross profit will progressively diminish as the date of the fire
recedes, and the scale of percentage for longer indemnity periods is graded
accordingly.
3. Extensions
On payment of additional premium, the C.L. Policy can be extended to include

“Add-on” covers included in the Fire policy such as Earthquake, spontaneous
combustion, accidental failure of public electricity / gas / water supply, etc.
Appropriate endorsements are attached to the policy.
4. Insured’s Property at other Locations
Owing to lock of space at their own premises a firm may find it necessary to
store commodities at different situations not in their own occupation.
Extension may be granted to cover interruption of business in consequence of

damage to insured’s property at locations other than the one to which the
policy applies. Such locations have to be specified in the policy and a limit
(expressed as a percentage of the sum insured) is placed on the amount payable
in respect of loss at any one location. The addition to the basic rate is produced
by applying a prescribed percentage.
This extension cannot be applied to insured’s other manufacturing premises.

These can be included in the description of the premises under the policy and
the rate applicable should be the average contents rate of all the units.
5. Damage at Supplier’s Premises
There are many firms who are dependent on the supply of raw materials, semi-
finished goods and components from other producers. Damage by insured perils
at suppliers’ premises may thus affect the production at the insured’s premises.

At an additional premium, the C.L. policy can be extended to cover this risk.
The relevant endorsement provides that loss as insured by the policy resulting
from interruption of or interference with the business in consequence of
damage (as within defined) to property at the suppliers’ premises shall be
deemed to be loss resulting from damage to property used by the insured at the
premises.
a) The Tariff provides that:
i. The extension should be restricted to original manufacturer’s

premises and not extended to intermediary trader’s premises.
ii. Unspecified locations and, suppliers abroad should not be covered.
iii. The indemnity period under the main policy and the extension should
be identical.
b) The rate of premium depends upon
i. The extent of dependence of the business upon the suppliers,

example, 5%, 10%, 15% and soon.
ii.
 Whether the dependence is on a number suppliers for similar
goods
 Whether the dependence is total on a number of separate

suppliers for different components
c) The name of the supplier, situation of premises and limit for any one
location expressed as a percentage of sum insured are specified in the
extension endorsement.
d) Similar extension can be granted on Customer’s premises. The cover is

against consequential loss to the insured arising out of named customers
not taking delivery of the products exclusively manufactured for them as
a result of operation of the insured perils at their premises. Premium
rates are the same as applicable to “Suppliers” premises but with a 20%
loading.
Test Yourself 1
The rate of premium for C.L. policy consists of which of the following
components?
I. Basis rate and percentage for indemnity period

II. Average fire rate and percentage for indemnity period
III. C.L. rate and percentage for indemnity period
IV. Basis rate and percentage of basis rate

WAGE INSURANCE, LAY-OFF COMPENSATION AND AUDITORS FEES CHAPTER 10
B. Wage insurance, Lay-off Compensation and Auditors Fees
1. Insurance of Wages
The basic fire policy covers gross profits which mean net profit plus insured
standing charges. The policy may, however, cover additional items such as
wages, lay-off/retrenchment compensation and auditor’s fees. So far as salaries
are concerned, it is generally accepted that they should be insured as a
standing charge for the full indemnity period selected for the gross profit item.
For wages, however, different considerations may apply, according to the

circumstances of the particular business. One of the outstanding characteristics
of recent years has been the growth in the importance of wages, due partly, to
the large proportion of total costs now frequently appropriated by wages, and
partly to the increased power of organized labour itself forming one reason for
this very appropriation.
The inclusion of all wages is the simplest method, especially when the relative
cost is not heavy, as in a highly mechanised factory. But in a labour intensive
industry this may be expensive as the premium is calculated on the sum insured
representing gross profit. Therefore, various methods of insuring wages have
been devised bearing in mind adequacy of cover and reasonable cost of
premium.
Methods of insuring wages
a) Insurance for full indemnity period
Insurance for the full indemnity period, by inclusion in gross profit as a

standing charge of wages
i. to employees in specified categories, or

ii. to the extent of …………. per cent of the total wage roll, or
iii. to the extent of a stated maximum amount
b) Annual method
Insurance for a shorter indemnity period of wages {not insured under (i), (ii)
or (iii) of a) above}, the sum insured representing the annual amount of such
wages, or if the indemnity period be over 12 months, the amount for the
period. This insurance supplements the cover under a) above.
Annual method may be arranged for differing indemnity periods.

CHAPTER 10 WAGE INSURANCE, LAY-OFF COMPENSATION AND AUDITORS FEES
Example
The insurance of a wage roll might be:
i. Included as a standing charge in the Gross Profit for 18 months Indemnity

Period – 15% of wage roll.
ii. Insured as a separate item on an annual basis for 6 months – Indemnity

iii. Insured as a separate item on an annual basis for 3 months – Indemnity

By this arrangement:
i. 100 per cent of wage roll is protected the first 3 months.

ii. 50 per cent of wage roll is protected during the next 3 months.
iii. 15 per cent of wage roll is protected during the last 3 months.
Note: Rating follows the normal scale according to Indemnity Period.
c) Period basis or Pro-rata basis
Insurance is for a shorter indemnity period of wages (not insured under a) or

b) above). The sum insured represents wages for the selected indemnity
period only.
Under this method, wages are covered for periods of 4 weeks, 5 weeks
………………… 10 weeks, ………….. and so on.
The amount payable under this item of cover is the actual amount paid as
wages to employees, whose services cannot be utilised at all and an
equitable part (based upon shortage of production) of the wages to
employees, whose services cannot be utilised by the insured in full.
This method is usually meant for unskilled or semi-skilled workers but

specified classes of employees may also be covered so that workers, skilled
or otherwise, may be retained to ensure that their services are available
when production commences.

The rates of premium vary according to the period selected. The scale is
provided in the Tariff is partly reproduced:
Period Multiple of basis rate

Not exceeding 4 weeks …….. 3.4 times
Not exceeding 8 weeks …….. 2.6 times
Not exceeding 12 weeks and so on 2.1 times
The rates may appear to be high but it must be remembered the rates are
calculated on sums insured smaller than for gross profit.
d) Dual Basis of insurance
This is a modern method of wages insurance and is becoming increasingly

popular. Under this scheme wages are entirely removed from the gross
profit cover, and are insured as a separate item. All wages are covered in
one item and for one amount – for an initial period, and a proportion only of
wages for the remainder of the indemnity period.
Example
Full wages insured for first 4, or 8 or 13 or 26 weeks, and so on.
Percentage of the wages insured for the remainder of the Indemnity period may
be 10, 15, 20, 25, 331/3, 50, 66 2/3 or 75.
Two important features of this method are
i. Carry over provision
Any wages saved during the initial period can be utilised during the
remaining period. Thus, the insured may scale down labour immediately
following damage, and utilise the labour force in good time before required
on actual production.
ii. Option to Consolidate
By the provisions of this clause the insured is given the option to convert,
without additional charge, his existing dual basis cover into a
straightforward 100 percent wages cover for an increased number of weeks,
but without any continuing cover other than whatever may be available by
the carry-over of savings provision. The actual period of extended full cover
is governed by the rate of premium already paid for the original dual basis
cover.

There is no stipulation in the wording of the clause as to when the “option

to consolidate” should be exercised; this being determined by the
circumstances of each particular case, but normally the option would be
exercised at the time when the claim is made.
This can be useful in cases where, although the interruption is

comparatively short, it is nevertheless longer than the initial period selected
in the Dual basis cover, and where the insured would not wish to discharge
any of his work-people.
The rates of premium vary according to the Indemnity Period, Period of full
cover of wages and Proportion of wages insured for the remainder of the
Indemnity Period.
Example
Percentage of basis rate to be charged for this cover is as follows:
Indemnity Full Cover Partial Cover

Period
100% 10% 15% 20% etc.
12 months 4 weeks 36% 39% 42%

------------- 8 weeks 44% 47% 50%
18 months ---------- ---------- ---------- ----------
24 months ---------- ---------- ---------- ----------
36 months ---------- ---------- ---------- ----------
Thus, if the total wage roll of Rs.10 lacs is insured on dual basis for 100% for 4
weeks and 20% of the remaining period under an Indemnity Period of 12 months,
the rate of premium is 42% of the basic rate.
i. Advantages of Dual basis method
The wages are entirely removed from the gross profit cover and receive
separate treatment. This enables the insured to scrutinise his wages position
more carefully, and to facilitate the arrangement of adequate sums insured.
If wages are insured under Gross Profit item, they will be merged with other
standing charges and it is quite likely, there may be under-insurance which
is penalised by the application of average.
‘Carry over’ and ‘Option to consolidate’ provisions provide flexibility to the

insured as regards utilisation of labour according to circumstances after a
loss.

ii. The following limitations apply to this method
 The initial period of full cover must not be less than 4 weeks.
 The following period of partial cover must be for the remaining of

the indemnity period applying to the gross profit item, which must
not be less than 12 months.
 The proportion of wages insured for this following period must not be
less than 10 per cent
 The item must be included on a policy insuring Gross Profit and for
the same indemnity period.
 The sum insured on wages shall represent the wages for the
indemnity period and average shall be applied on that basis.
To conclude, the only safe method is to insure all wages under gross profit
item for the full indemnity period. This, of course, will be economically
viable for small businesses and medium businesses also where the workers
would be retained.
In other concerns, the choice of method of insuring wages would depend

upon the circumstances of the particular business.
2. Lay-off / Retrenchment Compensation
Due to operation of certain regulations under the Industrial Disputes Act, 1947,
a statutory payment has to be made by employers as per the provisions
incorporated in the Act to such workers, as are laid off and / or retrenched in
the event of closure of manufacturing concern due to circumstances beyond the
control of the employers such as “Fire” or the operation of any other insured
peril.
This liability is found to be quite substantial and is usually desired to be covered

under the consequential loss policy by the concern. The cover is specifically
meant to include Insured’s liability under the Act towards employees.
The specification of this cover provides as follows:
“The insurance under this item is limited to the amount which the Insured shall
become legally liable to pay and shall pay to the employees as Lay-Off and/ or
Retrenchment Compensation under the provisions of the Industrial Disputes Act,
1947 and all subsequent amendments thereto.
Provided that the amount payable as indemnity under this item shall not exceed
the amount which would otherwise have been payable as wages to the said
employees during the Period of Indemnity, had no damage occurred.

Provided also that if the sum insured by this policy shall be less than the
aggregate amount of combined Lay-Off and Retrenchment Liability to the said
employees the amount payable shall be proportionately reduced
For the purpose of this item the term “Employees” shall mean employees (other
than badli workmen or casual workmen) who have completed not less than one
year of continuous service in the employ of the Insured, but excluding those
employees whose remuneration is insured as a Standing Charge under item of
Gross Profit”.
A loading of 50% over the Consequential Loss basis rate is chargeable for this
cover.
The following points have to be noted.
a) The term “Lay-off” is defined in the Industrial Disputes Act as “the

failure, refusal, or inability of an employer on account of shortage of
coal, power or raw materials or the accumulation of stock or the break-
down of machinery or for any other reason to give employment to a
workman whose name is borne on the muster rolls of his industrial
establishment and who has not been retrenched.”
b) The term “Retrenchment” is defined as “the termination by the

employer of the service of a workman for any reason whatsoever,
otherwise than as a punishment inflicted by way of disciplinary action
but does not include:
i. Voluntary retirement of the workman, or
ii. Retirement of the workman on reaching the age of superannuation, if

the contract of the employment between the employer and the workman
concerned contains a stipulation in that behalf. or
iii. Termination of the service of a workman on the ground of continued ill-

health.
c) The compensation payable by the employer for “Lay-Off” or

“Retrenchment” is laid down in the Act. It is important that the sum
insured fixed under this extension should be adequate to cover the total
legal liability of the employer under the Act. If not, pro-rata average will
apply.
d) The extension clause defines “employees” in line with the definition in

the Act and, in addition, excludes those employees whose remuneration
is insured as a standing charge under Gross Profit item.

3. Auditors Fees
Under condition 3 of the policy the insured is required at his own expense to
produce books of account and other documentary evidence to support his claim.
The insured will usually ask his auditors to produce the information required. It
is also convenient for the surveyors to work in conjunction with the auditors,
thus saving a good deal of time and unnecessary work to the insured.
The auditor’s fees for this work can be insured. These fees are to be
distinguished from normal audit fees paid in the ordinary course of business and
which are insured as standing charge.
The wording of the “Auditor’s Clause” is as under:-
The insurance under item No ………….. is limited to the reasonable charges

payable by the Insured to their Auditors for producing and certifying any
particulars of details contained in the Insured’s books of account or other
business books or documents or such other proofs, information or evidence as
may be required by the Company under the terms of Condition 3 of this Policy.
Any particulars or details contained in the Insured’s books of account or other
business books or documents which may be required by the Company under
condition 3 of this Policy for the purpose of investigating or verifying any claim
hereunder may be produced and certified by the Insured’s Auditors, and their
certificate shall be prima facie evidence of the particulars and details to which
such certificate relates.”
The sum insured for this item is to be fixed by the insured.
The rate of premium is 100% of the basic rate.
Test Yourself 2
Which of the following method of wages insurance has the feature of ‘carry over
provision’?
I. Insurance for full indemnity period

II. Annual method
III. Period basis
IV. Dual basis of insurance

CHAPTER 10 GROSS PROFIT SPECIFICATION
C. Gross profit specification
1. ‘Output’ Basis of Specification
Turnover is used as the index of business activity – and therefore, as the

measure of loss, in the great majority of consequential loss insurances.
In Chapter 9 the relation of production costs, standing charges and net profit to
turnover was understood; it was seen that loss of gross profit could be
conveniently measured by ascertaining the ratio of gross profit to turnover and
applying that ratio of gross profit to shortage in turnover.
In the same way, every unit of production earns its due proportion of gross
profit, and it follows that loss of gross profit can be measured by ascertaining
the rate of gross profit per unit of production and applying it to the shortage in
the number of units produced.
The wording of the ‘Output’ basis of specification is the same as that used for
‘Turnover’ specification, except that ‘Turnover’ is substituted by ‘output’.
Definition
Output is defined as the quantity of commodity (to be specified) produced at

the premises measured in units of …………………
Example
i. Brewery: The quantity of beer brewed at the premises measured in units of

one barrel of ….. Litres capacity
ii. Paper mill: The quantity of paper manufactured measured in units of one
ton of finished paper.
iii. Flour mill: The quantity of flour manufactured measured in units of one
sack of 100 kg weight.
Definition
The rate of gross profit is defined as the rate of gross profit per unit earned on
the output during the financial year immediately before the date of damage.

GROSS PROFIT SPECIFICATION CHAPTER 10
Calculation of loss under ‘output’ basis follows the same approach as under
‘turnover’ basis.
Example
If 5000 radio sets (units of production) are produced and sold @ Rs. 1000/- per
set, the selling price of each radio set is made up of cost of production (70%)
Standing Charges (20%) and net profit (10%).
Example
The following is an illustration of settlement of a straightforward loss on

‘output’ basis.
Sum Insured Rs.12,00,000
Sum of Net Profit + Insured Rs.15,00,000

Standing Charges (Gross Profit)
Rs.300 per unit
Rate of Gross Profit Rs.15,00,0 00
5,000
Standard Output 5,000 units
Output during Indemnity Period 2,500 units
Shortage in Output 2,500 units
Clause (a) Rs. 300 X 2,500 Rs. 7,50,000
Clause (b) Additional Expenditure Rs.1,00,000
Rs.1,00,00 0 X N.P. and Insd. S.C. 15,00,000 Rs.1,00,00 0

N.P. and all S. C. 15,00,000 Rs.8,50,00 0
Rs.10,000
Saving in Insured Standing Charges
Rs.8,40,00 0
Average:
Rate of Gross Profit X Annual Output =
Insurable Amount
Rs. 300 X Rs. 5,000 = Rs. 15,00,000
Sum Insured Rs.12,00,000
12,00,000 x 8,40,000
Claims amount payable 15,00,000
= Rs. 6,72,000
The output basis is adopted where loss measurement under turnover basis does
not provide a fair indemnity to the insured, as when accumulated stocks are
used by the insured to maintain turnover in which case there will be no
reduction in turnover although there is reduction in output.

In the normal policy, it is incumbent upon the insured to minimise the loss in
every way possible. It is frequently found that although production is
interrupted in a manufacturing risk, it is possible to maintain turnover by using
up accumulated stocks of finished goods.
The result may be that no shortages in turnover during the indemnity period can
be shown, and no loss is payable under the policy, and this may operate as a
hardship upon the insured.
This difficulty can be avoided by the issue of an Output Policy.
It must be noted, however, that even when the policy is on turnover basis the
problem can be solved by the insertion of “Accumulation Clause” at no extra
premium. The clause reads as follows:
“In adjusting any loss, account shall be taken and an equitable allowance is
made, if any shortage in turnover due to the damage is postponed by reason of
the turnover being temporarily maintained from accumulated stocks of finished
goods in the insured’s warehouses.”
The Tariff Advisory Committee has introduced Alternative Basis Clause which
reads as under
“It is agreed and declared that whenever found necessary, the term output may
be substituted for the term TURNOVER and for the purpose of the policy Output
shall mean the sale value of goods manufactured by the insured in the course of
the business at the premises.
Provided that
a) Only one such meaning shall be operative in connection with any one
occurrence involving damage (as within defined).
b) If the meaning set out above be used Memo No.1 shall be altered to read
as follows:
Memo 1: If during the INDEMNITY PERIOD goods shall be manufactured other

than at the premises, for the benefit of the business, either by the Insured or by
others on the Insured’s behalf, the sale value of the goods so manufactured
shall be brought into account in arriving at the Output during the Indemnity
Period”
This clause is a definite improvement on the policy and provides for losses to be
adjusted on Sale Value of Output basis under policy issued on Turnover basis.

The student may note that this clause is only to provide correct indemnity by
identifying the exact loss.
Note: Sale value of output - measures loss of production but in terms of money
To conclude, the ‘output’ basis is useful in the following circumstances:
i. When one or more standard products are manufactured, where each unit
of production can be said to earn a regular proportion of gross profit.
ii. Where there is efficient cost accounting system to determine the overall
cost per unit of production.
iii. Factory is working at a constant rate of production, sales show a definite

seasonal tendency or are liable to irregular fluctuations.
iv. Where there is appreciable time lag between production and sales, there
can be interruption of production without any immediate or
corresponding reduction in turnover.
2. ‘Difference’ Basis of Specification
In Chapter 9 Gross Profit has been defined as net trading profit plus specified
insured standing charges. This is known as ‘additions basis. As an alternative,
gross profit may be arrived at on the ‘difference’ basis.
Under this specification Gross Profit is the amount by which the sum of the
Turnover and the amount of the Closing Stock exceeds the sum of the amount of
the Opening Stock and the amount of the Specified Working Expenses
Note 1: The amount of the Opening and Closing Stocks shall be arrived at in
accordance with Insured’s normal accountancy methods, due provisions being
made for depreciation.
Specified Working Expenses (to be listed):
a) All Purchases (less Discounts Received)
b) % of the Annual Wage Roll (including holiday and Insurance

contributions).
c) Power
d) Consumable Stores
e) Carriage
f) Packing Material

g) Bad Debts
h) Discounts Allowed
i) Any other expenses to be specified.
Note 2: The words and expressions used in this definition shall have the
meaning usually attached to them in the books and accounts of the insured.
By eliminating all directly variable expenses out of the total turnover, the
insured gross profit is ascertained. The figure thus arrived at will be the same as
when net trading profit is added to specified standing charges.
The ‘difference basis’ is a simpler method and has several advantages:
a) Since there is no need to list out specified standing charges, the chance
of any of the standing charge being inadvertently omitted and,
therefore, remaining uninsured is eliminated.
b) Again the problem associated with the periodical review of the standing
charges does not exist. Nevertheless, review is necessary to see, if any
new variable charge should be excluded.
Note 1 in the definition provides that the amount of the opening and closing
stocks shall be arrived at in accordance with the insured’s normal accountancy
methods after due provision for depreciation. These balances shown in the
Profit and Loss Account would include work in progress as well. The
depreciation in value under these heads arises on account of market
fluctuations. The differences in balance would have a considerable effect on
the Gross Profit.
3. New Business Clause
Loss of Profits insurance is sometimes effected on new business for which past
annual results would not be available for comparison in case of loss in the first
twelve months. This situation is tackled by addition of the following clause:
“For the purpose of any claim arising from damage occurring before the
completion of the first year’s trading of the business at the premises, the terms
‘Rate of Gross Profit’, ‘Annual Output / Turnover’ and ‘Standard Output /
Turnover’ shall bear the following meanings and not as within stated:

Rate of gross profit earned on the During the period between the date
output / turnover of commencement of the business
and the date of the damage.
Annual Output / turnover: The
proportional equivalent for a period Do
of twelve months or the output /
turnover realised.
Standard Output / Turnover: The
proportional equivalent for a period Do
equal to the indemnity period of the
output / turnover realised.
These definitions are subject to the ‘trends, variations and special

circumstances’ clause of the usual Turnover / Output wording. After twelve
months of trading have been completed the normal specification wording
operates.
4. Revenue Policies
Revenue policies are appropriate for cases where the undertaking provides a
service, as opposed to a manufacturing business where the raw material
(variable charge) would be the biggest single item in the accounts. These
policies are used for Clubs, Hotels, Private Schools, Private Hospitals and
Nursing Homes, etc.
The policy broadly follows the pattern of the turnover policy but ‘turnover’ is
replaced by ‘gross revenue’.
Gross revenue is defined in the policy as
Definition
The money paid or payable to the insured for services rendered in the course of
the business at the premises.
The specification incorporates: definitions of Indemnity Period, Standard Gross

Revenue and Annual Gross Revenue, and Special Circumstances clause and
refund of premium clause.
The sum insured is the gross revenue and the amount payable under the policy
is
a) The amount by which the gross revenue during the indemnity period falls
short of the standard gross revenue. (There is no need to introduce a
rate of gross profit in loss measurement as the whole revenue is insured)

b) Additional expenditure incurred for avoiding or diminishing the loss of

gross revenue.
c) Subject to average, if the sum insured is less than the Annual Revenue.
5. Gross fees policy
This policy is suitable for professional persons such as solicitors, chartered

accountants etc. The policy is similar to the Revenue Policy but with additional
items of coverage.
Definition
The gross fees are defined in the policy as “the money paid or payable to the
insured for services rendered in course of the business of the insured”.
The specification provides for three items of coverage
Sum Insured
1. On Gross Fees Rs.
2. On Additional Expenditure Rs.
3. On legal, clerical & other charges Rs.
Note: Items 2 and 3 are additional under this policy.
a) The insurance under item 1 is in respect of
i. Loss of gross fees (The amount by which Gross Fees earned during the
Indemnity Period falls short of the Standard Gross Fees)
ii. Increased cost of working
b) The insurance under items 2 is limited to such further additional

expenditure beyond that recoverable under item 1(ii), in connection
with the fitting up of temporary offices, increased rent, rates and taxes,
lighting, heating and insurance thereof, removal costs and incidental
expenses.
c) The insurance items 3 is limited to legal, clerical and other charges

incurred in the replacement of deeds, documents, manuscripts, plans ,
books of account, card indexes, etc. The cost in respect of any one
document plan book or card index set is limited to Rs. ________.

CLAIMS PROCEDURE CHAPTER 10
Test Yourself 3
__________ is defined as the rate of gross profit per unit earned on the output
during the financial year immediately before the date of damage.
I. Rate of gross profit

II. Rate of Net profit
III. Rate of Turnover
IV. Rate of Output
D. Claims Procedure
1. Duties of insured
The duties of the insured upon the happening of “damage” are set out in
condition 3 of the policies:
a) Notice must be given to the Company forthwith
If the damage is serious, the insurers may wish to appoint surveyors

forthwith to examine the steps being taken to minimise loss and speed in
this respect is essential.
Even if it appears at first that damage is not serious, it is still important to

advise the insurers, as subsequently it may transpire that minor material
damage is causing serious interruption. The early assistance of the Company
should always be sought in the insured’s own interest, since the surveyor
with his experience may be able to make valuable suggestions for the
benefit of all concerned.
b) All possible steps must be taken to minimise the interruption.
The surveyor’s advice will be available for this purpose.
c) Particulars of claim, supported by necessary evidence, must be

furnished within 30 days after expiry of the indemnity period
i. Particulars of claim must be submitted as soon as the business ceases

to be affected.
ii. In spite of the specific requirement of submission within 30 days, it is

frequently difficult in small claims to obtain the requisite
information, and it is, therefore, necessary to remind the insured of
the remainder of the condition, which states that no claim shall be
payable unless the terms of this condition have been fulfilled.

CHAPTER 10 CLAIMS PROCEDURE
When the circumstances of the damage are past history, claim

settlement becomes more difficult, by reason of other factors which
may have intervened to affect the results of the business.
iii. The expenses of preparing the claim, extracting particulars from his
books and producing evidence in support of it fall upon the insured.
As mentioned earlier the Insured can however insure the Auditors’
fees for producing and certifying any particulars or details contained
in the Insured’s books and records as may be required by Insurers.
d) Payment on account
‘Payments on account’ already made, must be repaid in the event of

non-compliance with any of the requirements of the condition.
When income is reduced, there may be heavy continuing standing

charges which can only be met by making advance payments in
anticipation of the final loss adjustments. Although in certain instances
this may be justifiable and necessary, there is here a source of trouble if
the loss payable by the company should for any reason (for example,
gross under insurance) proves to be smaller than first expected.
On being advised of the damage, the insurers examine the contract to

ensure that the claim is one falling within the terms of the cover granted
example, that the cause of the damage is an insured peril, that the
premises where the damage has occurred, and the business carried on in
those premises, are as specified in the policy.

2. Steps taken by insurer under claim settlement
Diagram 1: Steps taken by insurer under claim settlement
Usually material damage and loss of profits policies will be with the same
insurer who can appoint the same surveyor for both loss assessment. However,
depending upon circumstances different surveyors may also be appointed.
a) Furnish the Loss Adjuster with necessary particulars of insurance
The insurers take steps at once to furnish the Loss Adjuster with all
necessary particulars of the insurance, including a copy of the policy, to
enable him to act on their behalf with full knowledge of the extent of
liability.
Full co-operation between the surveyor and the insurers is particularly

important in consequential losses, which call for specilised knowledge of the
policy as well as the practical work of supervising clearance of debris and
instituting steps for hastening resumption of work.

Example
It is necessary to make a speedy checking up of the adequacy of the sum

insured so that, if necessary, the insured may be made aware that, on
account of under-insurance, he may be required to share to some extent in
any additional expenditure.
b) To ascertain that the peril causing the loss is also covered by the
Consequential Loss policy
Once it is clear that liability for the loss attaches to the material damage
policy, the surveyor makes certain that the peril causing the loss is also
covered by the Consequential Loss policy.
c) Surveyor recommends measures for speedy resumption of business
Next the surveyor recommends measures for speedy resumption of business,

making it clear that increased cost of working will be payable subject to
policy terms, example, earning of turnover by the increased cost and
penalty if all standing charges are not insured.
d) Preparation of preliminary report
The surveyor prepares a preliminary report indicating the extent of the

interruption expected, the steps being taken to minimise the interruption,
and the amount which in his opinion should be provided in the insurers’
books as a reserve against the estimated loss.
It is difficult to say at once what the length of interruption is likely to be

and therefore, difficult to estimate the probable loss. The practice is to
estimate generously.
e) Preliminary examination of the accounts if the business
As soon as practicable, the necessary preliminary examination of the

accounts of the business is made in order to ascertain whether all standing
charges, have been insured, and whether the amount insured on net profit
and insured standing charges adequate for the expectations of the business.
The surveyor may make the necessary examination of the accounts or the
details required may be provided by the insured’s auditors. If it is clear that
the insured will have to bear a proportion of the increased cost, this should
be made known to him.

f) Periodical visits by surveyor
The surveyor pays periodical visit to the scene of the damage, to ensure that
all possible steps are being taken towards resumption of normal work, and
he reports thereafter, to the company making such observations as may be
necessary, and, in particular, reporting on the adequacy or otherwise of the
estimate of loss.
The adjusters don’t proceed to final adjustment of the loss until the
business has ceased to be affected by the damage, unless the interruption
should extend beyond the expiry of the maximum indemnity period.
g) Detailed examination of the accounts for preparing the final

assessment
When it is clear that the business has resumed its normal working
conditions, the surveyor takes up the detailed examination of the accounts
for preparing the final assessment. At this stage, the student should revise
how the claim amount is computed (Refer to illustrations in Chapter 9).
h) Final Assessment of loss
The surveyor needs the following figures from the insured’s accounts to
draw up the final assessment of loss.
i. Turnover and gross profit from the final accounts of the previous
financial year, to arrive at the rate of gross profit.
ii. Turnover during the indemnity period and standard turnover to

determine the shortage
iii. The increased cost of working and the turnover maintained thereby
iv. The insured standing charges and uninsured standing charges
v. The insured standing charges not incurred during the indemnity period.
vi. Annual Turnover to determine under insurance.
i) “Trends, Variation and Special Circumstances” clause
Finally the surveyor has to consider application of the “Trends, Variation

and Special Circumstances” clause to adjust the rate of gross profit, annual
turnover and the standard turnover.
The other procedural aspects such as payment of claim, reduction of sum

insured and its reinstatement etc are the same as under material damage
claims.

Test Yourself 4
In the claim settlement process which of the following details are not included
in preliminary report submitted by Surveyor?
I. The extent of interruption expected

II. The steps being taken to minimise the interruption
III. The amount which in his opinion should be provided in the insurers’ books as
a reserve against the estimated loss.
IV. Final Assessment of loss

SUMMARY CHAPTER 10
Summary
a) The rate of premium for C.L. policy consists of two components: Basis rate
and Percentage for the Indemnity Period.
b) In calculating basis rate the contents of any storage / utility blocks even if
they are communicating with process blocks should not be taken into
consideration.
c) On payment of additional premium, the C.L. Policy can be extended to

include “Add-on” covers included in the Fire policy such as earthquake,
spontaneous combustion, etc.
d) The basic fire policy covers gross profits which mean net profit plus insured
standing charges. The policy may, however, cover additional items such as
wages, lay-off / retrenchment compensation and auditor’s fees.
e) Methods of insuring wages
iv. Insurance for full indemnity period

v. Annual method
vi. Period or pro rata basis
vii. Dual basis of insurance
f) Under the Industrial Disputes Act, 1947, a statutory payment has to be made
by employers as per the provisions incorporated in the Act to such workers,
as are laid off and / or retrenched in the event of closure of manufacturing
concern due to “Fire” or the operation of any other insured peril.
g) Under condition 3 of the policy, the insured is required at his own expense
to produce books of account and other documentary evidence to support his
claim for which he may ask his auditors to produce the information required.
The auditor’s fees for this work can be insured.
h) Turnover is used as the index of business activity– and therefore, as the

measure of loss, in the great majority of consequential loss insurances. The
wording of the ‘Output’ basis of specification is the same as that used for
‘Turnover’ specification, except that ‘Turnover’ is substituted by ‘output’.
i) The output basis of specification is adopted where loss measurement under

turnover basis does not provide a fair indemnity to the insured, as when
accumulated stocks are used by the insured to maintain turnover in which
case there will be no reduction in turnover although there is reduction in
output.

CHAPTER 10 SUMMARY
j) Under the Difference basis of specification Gross Profit is the amount by

which the sum of the Turnover and the amount of the Closing Stock exceeds
the sum of the amount of the Opening Stock and the amount of the
Specified Working Expenses.
k) For claim settlement usually material damage and loss of profits policies will
be with the same insurer who can appoint the same surveyor for both loss
assessments. However, depending upon circumstances different surveyors
may also be appointed.

Answer 1
The rate of premium for C.L. policy consists of two components: Basis rate and
percentage for indemnity period.
Answer 2
Carry over provision is a feature offered under dual basis of insurance method.
Answer 3
Rate of gross profit is defined as the rate of gross profit per unit earned on the
output during the financial year immediately before the date of damage.
Answer 4
Details regarding final assessment of loss cannot be provided under preliminary

report submitted by Surveyor.
Question 1
Under which of the following methods of insuring wages, scheme wages are
entirely removed from the gross profit cover, and are insured as a separate
item?
I. Insurance for full indemnity period

II. Annual method
III. Period basis
IV. Dual basis of insurance

Question 2
Which of the following case is an example of ‘Retrenchment’?
I. Voluntary retirement of workman

II. Termination of a workman by the employer for any reason whatsoever
III. Retirement of the workman on reaching the age of superannuation
IV. Termination of the service of a workman on the ground of continued ill-
health
Question 3
_______________is defined as “the money paid or payable to the insured for

services rendered in the course of the business at the premises”.
I. Gross profit
II. Net profit
III. Gross revenue
IV. Net revenue
Answer 1
Under dual basis of insurance method of insuring wages, scheme wages are
entirely removed from the gross profit cover, and are insured as a separate
item.
Answer 2
Termination of a workman by the employer for any reasons whatsoever is an

example of ‘Retrenchment’.
Answer 3
Gross revenue is defined as “the money paid or payable to the insured for
services rendered in the course of the business at the premises”.

CHAPTER 11
SPECIALISED POLICIES AND OVERSEAS PRACTICE
In this chapter we will look at the features, components of and risks covered
under some specialised policies like Petrochemical Tariff and Industrial All Risk
Policy. We will also look at the rating factors, minimum requirements for
granting covers and excess clause applicable for these policies.
We will also learn about the overseas practices followed in the UK and the US
with regards to fire insurance.
Learning Outcomes
A. Specialised policies and overseas practice

CHAPTER 11 SPECIALISED POLICIES AND OVERSEAS PRACTICE
A. Specialised policies and overseas practice
1. Petrochemical Tariff
a) Need for Petrochemical Tariff
Oil and Petrochemical Industry, a fast growing industry in the world, is a

‘high risk’ area for insurance. Underwriting of these plants against fire and
explosion risks requires special expertise as virtually everything used in the
plants may burn or explode. The potential risk of fire / explosion is of a high
magnitude in a large complex where bulk quantities of highly flammable
materials mostly in liquid, vapour and gaseous form are handled.
The need for introduction of a tariff based on scientific principles was felt in
the Seventies as several property and business interruption losses exceeding
Rs. 1 Crore were reported.
i. The first version of ‘Petroleum processing and Petroleum Refining’

tariff (now known as Petrochemical Tariff) was introduced in the year
1976.
ii. The Tariff was, thereafter, revised in 1981, 1987, 1996, 2000 and in 2001
to meet the changing requirements of the industry.
b) Components of Petrochemical Tariff
The Tariff comprises:
i. Definitions,
ii. Eligibility criteria,
iii. Rating procedure for arriving at the basic rate of the plants,
iv. Application of loadings and discounts for inferior and superior features
respectively,
v. Recommended distances between plants, plants and tank farms, utilities

etc.,
vi. Details of ‘Mutual Aid Scheme’,
vii. Application of ‘Silent rates’,
viii. Regulations for electrical installation, fire and explosion protection

system, etc.

SPECIALISED POLICIES AND OVERSEAS PRACTICE CHAPTER 11
c) Risks covered under Petrochemical Tariff
Standard Fire and Special Perils Policy shall be issued to cover

manufacturing risks, storage risks and miscellaneous blocks rateable under
Petrochemical Tariff 2001
This cover can be granted to,
i. Petrochemical plants,
ii. Petroleum refinery plants including Sulphur Recovery
iii. Fertiliser plants with feed stocks like Naptha, Natural Gas, etc.
iv. LPG bottling plants (irrespective of sum insured)
v. Urea / Ammonia synthesis plants
vi. Ammonia plant deriving its hydrogen supply by electrolysis of water
vii. Tankages, piping, utilities, auxiliary and miscellaneous buildings, loading

and un-loading areas situated in the premises.
viii. Non-petrochemical plants located in petrochemical complexes
This tariff is applicable:
i. For risks using Class A and / or Class B hydrocarbon / natural gas as basic
raw materials and
ii. Where the Total Sum Insured in one compound/complex exceeds Rs. 50
Crores and
iii. The sum insured of plant(s) using Hydrocarbon (Class A / Class B) /

natural gas as basic raw materials is in excess of 35% of the total sum
insured of the risk
Note 1: “Urea Synthesis Plant” shall be rated under this tariff and a basic
rate of Rs. 2.75%subject to warranties given under Section 6 shall apply.
Note 2: Following are the types of risks excluded from the scope of
Petrochemical Tariff:
i. Plants where basic raw materials are not Hydro-carbon although the
units constituting the plant may be manufacturing Hydro-carbon or
further processing them to make a final product.

ii. Bottling Plant of LPG and similar materials located outside the refinery
premises.
All premises and /or goods rateable are subject to the provisions of AIFT
unless otherwise specifically provided.
d) Minimum requirement for granting cover
All risks falling under this Petrochemical Tariff have to satisfy minimum
requirements for granting cover
i. Fire protection: The plant area should be protected with hand

appliances in accordance with the Fire Protection Manual and hydrant
service having the prescribed minimum condition of pumping capacity
and discharge pressure and two hours water supply for the pumping
capacity.
Non-petrochemical plants, which were constructed prior to 1.1.96 and do

not comply with the above warranty may be exempted there from.
All hazardous storage areas and tank farms should be protected by hydrant
services.
ii. Electrical Installation throughout the premises to comply with the rules
laid down by TAC
All process equipment and storage vessels should be continuously

electrically bonded and grounded to give adequate protection against
lightning and for safe dissipation of static discharge.
All concrete structures and buildings and tankages should be adequately

protected against lightning hazard.
Satisfactory preventive plant inspection procedures and maintenance

practices should be in force to ensure safe operating conditions.
The Tariff prescribes additional warranties. Appropriate warranties are to be

inserted to ensure compliance with the requirements.
e) Applicable to plants/storages/utilities and details of loading for non-

compliance
i. The premises’ in which the plant is situated is enclosed completely from

all sides by fencing and/or boundary walls.
ii. All roads essential for fire-fighting around plant, tankages, storage area
and utilities are of a minimum of 6m width.

iii. The process in operation is a proven process with adequate experience in

commercial production beyond pilot plant stage.
Note: Proven process is a process in which chemical reaction involved and

major equipment installed have been in operation on a commercial scale of
same or higher size in at least one installation elsewhere in the world or the
plant should have completed a satisfactory run of at least five years.
f) Applicable to Tank Farms
No tank used for storing Class A and B products has a storage capacity
exceeding 30,000 K. Litres,
(Note: The Tariff classifies ‘Flammable’ materials into Classes A, B, C, D

according to their flash point.)
g) Classification of flammable materials
Class of products Flash Point

Class A Below and up to 230 C
Class B Above 230 C and up to 650C
Class C Above 650 C and up to 93 0C
Class D Above 930 C
h) Applicable to plants, storages, utilities etc.
Discounts off the basic rates may be given for superior features if the given
warrantees are complied.
i) Silent Risks
The risk is deemed silent only if all the hydrocarbon / flammable materials
/combustible materials have been removed and it has been purged (i.e. all
apparatus and piping have been thoroughly cleaned) before the inception of
silent period and would continue to be so throughout the silent period. The
plant is thus completely empty of hydrocarbon / flammable materials/
combustible materials and is completely out of use.
This requirement shall be complied with all the plants which are linked to
one another and are not separated by a minimum specified distance as per
this tariff.
The silent period excluding the period required to purge the plant and the
period of start-up, shall at least a continuous period of 60 days.

j) Rating
The basic rate for each petrochemical plant is arrived at on the basis of the
following factors:
i. Properties of chemicals
ii. Quantity of flammable materials handled
iii. Type of each identifiable process / operation
iv. Temperature and Pressure
v. Material of construction
i. Process operation hazard factor for each equipment in process unit as

per Table 1
ii. Modified process factor by loading relating to operating temperature &

pressure as per Table 2
iii. Final process hazard factor by loading for additional hazard factor for
hold up capacity of quantity of material in the discreet circuit as per
Table 3
iv. Basic rate for process unit per millee will be the highest of the basic
rates so derived for the various equipment units.
Basic rate for process operation equipment is based on final process hazard
factor from 1 to 5.25 and applicable material factor from 4 to 41. For
ascertaining material factor quantity of material factor less than 5% of
weight or one tonne whichever is less; except in case of hydrogen where it
would be less than 2.5% by weight of one tonne whichever is less may be
ignored in ascertaining the material factor as per Table 4
For Storage Tanks; Utilities, Piping, Miscellaneous Buildings, LPG Bottling

Plants and Non Petrochemical Plants and Silent risks, separate rates are
given in the Petrochemical Tariff subject to warranties for non-compliance.
The rating pattern involves the following steps:
i. Each equipment of the plant in a process unit is evaluated to arrive at

the fire and explosion hazard factor. The equipment with the highest
hazard factor is identified as the basis for further loadings for inferior
features like absence of emergency power supply for critical equipment,
and discounts for superior features like fire proofing of structural steel
and equipment supports, fire protection systems etc.; to arrive at the
final rate for fire and explosion perils for a particular plant.

ii. The Fire and Explosion rate for each plant, after application of all
loading and discounts, should neither be less than 65% of the basic rate
nor shall it be more than 165% of the basic rate.
iii. A loading is added to the Fire and Explosion rate to obtain the package
rate chargeable for the risks of Riot, Strike, Malicious Terrorism Damage,
Aircraft damage & Impact damage.
k) Excess Clause
The insurance does not cover 5% of the claim amount subject to minimum of
Rs. 5 lakhs resulting from each and every loss in material damage insurance
for all perils. The excess is applicable per event and per insured.
While fixing discounts, the Committee will, in addition to amount of

Voluntary Deductible Excess opted, take into account Maximum Probable
Loss figures and Fire Protection and prevention measures. The discount
granted will be valid for a period of one year.
Application form in the prescribed form is to be submitted by the insured

through its insurer to reach HO, one month before the renewal/expiry of the
policy.
l) Mutual Aid Scheme Regulations
i. Office and staff requirements
The membership should be of two or more industrial plants, warehouse and

public utilities. The plants must be within 10 kilometer distance from the
most distant point. There shall be a permanent office for the secretariat
with necessary staff. A full time permanent secretary having a back ground
in Fire Fighting relevant to types of industries is included in the scheme. The
member industries should mutually evolve an effective liaison and
communication system. Call procedures in case of an emergency is laid down
and frequent exercises and tests would be necessary.
ii. Industrial members fire fighting requirements
The members must have portable fire fighting appliances, mobile fire pump
of at least 4000 gsm capacity, fire hydrant system, stock of foam compound
as per rule 7.8 of Fire Protection Manual. Fire and explosion accidents need
be fully investigated by the member unit and their findings which might be
fruitful and effective in preventing a recurrence should be made available to
all members without affecting plants autonomy.

In the event of outbreak of fire, the members of mutual aid scheme should
be able to supplement in the shortest possible time, the resources of the
affected plant. Fire and explosion safety of the plant and extension should
preferably be checked every six months, but at least annually by using audit
system and utilising check lists where appropriate. Practice drills consisting
of supervisory staff and Fire Marshalls should be arranged every two months
in different units to familarise those concerned and test the equipment
available in each unit.
iii. Interchangeability of equipment
Members must ensure interchangeability of equipment and complete

freedom of use between the member plants by exchanging information
regarding equipment so that adapter pieces can be kept ready for hooking
up, an adequate inventory of emergency equipment to ensure spare ability
to encourage self-sufficiency by each plant by not leaning unreasonably.
Each risk is expected to maintain a sensible policy so as not to strip itself in
case of a simultaneous disaster elsewhere.
2. Industrial All Risk Policy
a) Introduction
Following liberalisation of the economy, many multinational companies have

entered the industrial sector. These companies as well as international firms
who finance industrial projects demand comprehensive insurance coverage,
as is available in developed insurance markets. Thus, a need was felt to
devise a package policy covering a wide range of perils to which an industry
was exposed. The GIC and TAC after interaction with customer interests
represented by Chambers of Commerce and Trade bodies introduced the
Industrial All Risk Policy with effect from 01.07.1997.
b) Features
The salient features of this policy are:-
All industrial risks (other than risks rateable under Petrochemical Tariff)
having overall Sum Insured of Rs.100 crores and above in one or more
locations in India shall be eligible for Industrial All Risks Policy.
Cover granted under the Policy is:
Section I Material Damage

Section II Business Interruption

c) Perils covered
The cover in its widest form will include the following perils/covers:
Diagram 1: Perils covered under IAR policy
i. Compulsory
 Fire and All Special Perils

 Burglary (free)
 Machinery Breakdown/Boiler Explosion / Electronic Equipment
Insurance
 Fire loss of profit (Compulsory)
ii. Optional
 Machinery Loss of Profit cover
d) Excluded Losses
The cover is for All Risks / Perils other than those which are specifically
excluded. These exclusions are:
Damage to the property insured is caused by:
i.
 Faulty or defective design materials or workmanship; inherent vice;

latent defect; gradual deterioration deformation or distortion or
wear and tear

 Interruption of the water, gas, electricity or fuel supply or failure of

the effluent disposal systems to and from the premises.
Unless damage by a cause not excluded in the policy ensues and then the
insurer shall be liable only for such ensuing damage.
ii.
 Collapse or cracking of buildings
 Corrosion, rust, extremes or changes in temperature, dampness,

pollution, contamination, change in colour, flavour, texture or finish,
action of light, vermin, insects, marring or scratching.
Unless such loss is caused directly by damage to the property insured or to

premises containing such property by a cause not excluded in the policy.
iii.
 Larceny
 Acts of fraud or dishonesty
 Disappearance unexplained or inventory shortage misfiling or
misplacing of information, shortage in supply or delivery of materials
or shortage due to clerical or accounting error.
iv.
 Coastal or river erosion

 Normal settlement or bedding down of new structures.
Damage caused by
i. Willful act or negligence of the insured

ii. Cessation of work, delay, consequential loss
Damage occasioned directly or indirectly by war and warlike perils and

nuclear and atomic perils
Permanent or temporary dispossession of premises for various reasons (as in

fire policy)
e) Excluded Property
Similarly, the properties that are excluded from cover under the IAR Policy
are:
i. Money etc. (as in fire policy)

ii. Goods held in trust/commission unless specifically stated

iii.
 Vehicles, caravans, trailers licensed for road use, railway locomotives or

rolling stock, watercraft, aircraft, spacecraft or the like.
 Property in transit other than within the premises specified in the

Schedule
 Property or structures in course of demolition construction or erection

and materials or supplies in connection therewith
 Land, driveways, pavements, roads, runways, railway lines, dams,

reservoirs, canals, rigs, wells, pipelines, tunnels, bridges, docks, piers,
jetties, excavations, wharves, mining, property underground, off-shore
property, unless specifically covered
 Livestock, growing crops, or trees
 Property damaged as a result of its undergoing any process
 Property undergoing alteration repair testing installation or servicing

including materials and supplies
 Property more specifically insured
 Property insured if removed to any building other than as stated in the

policy
 Property which would have been insured under marine policy
f) Clauses
Following clauses will have to be attached to the policy and the insured will
have to adjust or provide additional sum insured where applicable as
discussed in earlier chapters.
ii. Architects’, Surveyors’ and Consulting Engineers’ Fees Clause
iii. Designation of Property Clause
iv. Omission to Insure Additions, Alterations or Extensions Clause

g) Compulsory Deductibles under IAR
i. Policies having Sum Insured above INR 100 Cr and up to INR 1500 Cr
per location for PD & BI
Material Damage 5% of claim amount subject to a

minimum of 10 lakhs
Business Interruption (FLOP Other 7 days of Standard Gross Profit
than Petro Chemical Risks)
Petro chemical risks Profit 14 days of Standard Gross
Business Interruption(MLOP) 14 days of Standard Gross Profit
ii. Policies having Sum Insured above INR 1500 Cr and up to INR 2500 Cr
per location for PD & BI

minimum of 25 lakhs
Business Interruption (FLOP Other 7 days of Standard Gross Profit
than Petro Chemical Risks)
Petro chemical risks 14 days of Standard Gross Profit
Business Interruption (MLOP) 14 days of Standard Gross Profit
iii. Policies having Sum Insured above INR 2500 Cr per location for PD &
BI

minimum of INR 50 lakh
Business Interruption
FLOP 14 Days of Standard Gross Profit
MLOP 21 Days of Standard Gross Profit
Note: The limit for sum insured is combined limit for MD + BI per location
h) Rating
Rates for this policy are based on:
i. The detailed Risk Assessment Report of the Engineer

ii. Deductible opted by the insured
iii. Claims experience
Taking the above factors into account (effective from May 1, 2000) rating
will be done as under:
i. Fire Section Rates applicable with F.E.A. and claims experience discount
as per the guidelines

ii. Burglary (free cover)
iii. Machinery Breakdown, Boiler Explosion and Electronic Equipment

Insurance @ 0.25%
iv. Business Interruption following fire etc. Tariff rates less 10%.
v. Business Interruption following Machinery Breakdown. Tariff rates.
The following discounts are also available:
i. Claims Experience Discount
After the operation of the IAR Policy for 2 years claims experience is
considered and discounts up to 25% are provided for. For adverse loss
experience, higher excess will be imposed at the discretion of the TAC.
ii. Discount for higher deductions
The policy is subject to specified compulsory deductibles as indicated

above. However, the insured can opt for higher deductibles, for which slabs
of discount on the premium rate have been prescribed. These are as under:
Material Damage Claims Deductible Discount

5% of the claim amount subject to minimum of Rs.10 lakhs 10%
5% of the claim amount subject to minimum of Rs.25lakhs 25%
Note: The Insured, if he so desires, may opt for higher deductibles than
indicated above and suitable discounts are considered.
i) Sum Insured
i. The policy in so far as it relates to Buildings, Machinery, Furniture,

Fixtures, Fittings and Electrical Installations shall be on Reinstatement
Value Basis only, while the Stocks shall be covered on Market Value
basis. However, the facility of declarations for stocks shall not be
available under the IAR Policy.
ii. The Policy shall be subject to condition of average. However, under-

insurance on each item of the schedule will be ignored if it does not
exceed 15% thereat.

3. Insurance Pool for Nuclear Disasters
News article
Liabilities arising from a nuclear disaster will soon be insured as the insurance
pool proposed by the national reinsurer – General Insurance Corporation of India
(GIC Re).
The move to create an insurance cover for nuclear reactors assumes significance
as India plans to ramp up its nuclear power generation capacity and also to allay
fears that rose in the aftermath of the Fukushima incident. At present, nuclear
reactors in India only have insurance cover for zones that are outside the area
of radiation and reactors.
The formation of the pool has been put on fast track. The operators will pay the
premium and the general insurance industry will provide the insurance cover.
The pool will be backed by international reinsurers and will be commercially
viable. It will be a comprehensive cover which will include construction,
testing, operation and liability.
While the negotiations on forming a pool for nuclear plants started in 2010, they
were stuck as the Government and international reinsurers were unable to
arrive at a consensus on inspection of the facilities. However, most domestic
nuclear power plants have now agreed to inspection by international teams.
Most of the nuclear power plants are now ready to undergo inspection. The
insurance pool will cover all nuclear power plants which are open to inspection
by international teams. The pool will cover the operators of nuclear plants as
stipulated in the Civil Liability for Nuclear Damage Act, 2010, which provides for
a liability of Rs. 1,500 Crore per nuclear incident.
There are 26 nuclear international pools across the world, which are linked to a
mother pool. So, for any risk, each one of them will take a small portion.
Similarly, when India joins the pool, all 26 pools will be extending their support
in a small way. We will also be able to provide them support in their risks”. The
pricing will be based on international rates.
Source: The Hindu Business Line
Overseas Practice
4. Practice in UK
There is no Fire Tariff in the U.K. However, to have some uniformity, The
Association of British Insurers (ABI) has issued a book “The Recommended
Practices, Wordings and Procedures relating to Material Damage.”

a) Standard Fire Cover
The standard fire policy covers only Fire, Lightning and Limited Explosion.
(The perils covered under the Indian Policies are wider than the limited ones
in the Standard Fire Cover of the ABI Policy).
The following perils are considered as special perils extensions:
i. Perils of a chemical type: i.e. explosion, spontaneous combustion

ii. Social Perils: riots, strike, malicious damage, civil commotion
iii. Perils of nature: storm, tempest, flood, earthquake, subsidence
iv. Miscellaneous Perils: Escape of water, aircraft damage and impact
damage
The policy has general exclusions. Due to certain American interpretations

that pollution liability comes under the material damage section of the
policy, it became necessary to review the wording to exclude pollution and
contamination cover.
The general conditions of policy are similar to the Indian Fire Policies.
b) “All Risks” Policy
The UK market also has an “All Risks” Policy.
As in the “Industrial All Risk” Policy of the Indian Market, this policy
specifies the exclusions. All other perils are generally covered. The limit of
liability can be chosen by the insured or offered by the insurer with a
reduction in premium.
Features: The “All Risks” policy indicates alongside the perils, the
deductible and the sum insured. Certain special features of the “All Risks”
Policy are:
i. Sum insured will be the limit of liability

ii. A first loss cover for certain perils thereby limiting the insurer’s liability
in the event of a claim
iii. Limit of liability for accidental damages
c) Lloyds Fire Policy
The other Fire Policy available is the “Lloyds Fire Policy”. This is a shorter
and a simpler form but covers only the following perils:
i. Fire and/or lightning

ii. Fire consequent on explosion wherever the explosion occurs
iii. Explosion consequent upon fire on the premises insured.

iv. Explosion of domestic boilers or of gas used for domestic purposes or for
heating and lighting.
Other exclusions are similar to the ones in the Indian Fire Policy. However,
the Lloyds policy does not have an arbitration condition. Disputes will have
to be settled in courts.
d) Other Perils Written in the Fire Market
Certain perils which are connected with property insurance are written in
the fire market in the UK. Some examples are:
i. Accidental damage cover for underground and overhead services like

pipelines and electricity lines
ii. Simple leakage of oil or other liquids from storage tanks
iii. Theft damage to buildings
iv. Escape of molten metal
These covers are not granted freely. The underwriter weighs the risks, raises
queries, arranges inspection, if required, and then decides whether to grant
the cover and, if so the terms and conditions of the cover.
e) Fixation of Sum Insured
The practice followed in UK is similar to that in the Indian Tariff. Buildings,

machinery, accessories, furniture, fixture, fittings and electrical installation
are advised to be covered on the reinstatement value basis. The other
clauses that are available are:
i. Escalation Clause
ii. Local Authorities Clause
iii. Cost of Erection
iv. Architects / Surveyors fees’ Clause
Similarly in case of stocks coverage on declaration basis and floater basis is

available. Sometimes cover is granted on first loss basis also.
Recently the UK market has developed some popular forms of cover such as
Combined Policies and Package Policies.
f) Combined Policies
These were introduced to cater to business risks where more than one type
of insurance was required; for example, fire, business interruption
(consequential loss), theft, money, glass, liability etc.
It is a single contract policy utilising one proposal. Whilst, however, it is

written as one contract, each section or class of insurance is underwritten

and rated separately and will contain its own conditions, terms, exclusions
and warranties. This, in effect means that the contract comprises a number
of single policies written under one ‘umbrella’ policy.
Benefits to the insured: The benefits of combined policies to the insured

are:
i. one proposal to complete;
ii. a single policy booklet or folder to retain and refer to;
iii. one premium payable;
iv. common renewal date for all covers;
v. easier reference for ‘day-to-day’ dealings with insurers and/or

intermediary, particularly in respect of claims;
vi. reduced premium levels (at option of insurer)
Benefits to the insurer: The benefits to the insurer of combined policies

are:
i. easier handling as regards staff resources;
ii. multi-disciplined expertise needed assists in good staff relations;
iii. single policy only required: reduces administration costs;
iv. one renewal document only needed;
v. ease of review for insurer and intermediary
The policy is written with separate wordings for each section, but the
insurer will treat the warranties on an individual basis: that is to say, if an
insured was to breach a ‘waste warranty’ on the fire section, it is unlikely to
affect a claim under the theft cover. Similarly, a breach of the ‘intruder
alarm warranty’ in respect of theft would not adversely affect a claim under
the fire or consequential loss sections.
However, there are conditions which are common to all sections. For
instance, if a non-disclosure of a fraudulent conviction came to light when a
theft claim was submitted, this would invalidate all sections of the policy.
Otherwise, each separate cover is subject of individual underwriting and
rating.

g) Package Policies
A package policy is also a single contract policy, but adopts a different

approach. Insurers have, for some time, recognised the need to attract
policyholders by trade.
The package policy is designed as a simplified and easily understood

contract which offers a full ‘package’ cover to particular trades or
occupations. This will incorporate the following covers:
i. fire material damage;

ii. consequential loss;
iii. theft, money, glass;
iv. goods in transit;
v. employers’ liability;
vi. public / products liability;
vii. fidelity insurance (occasional);
Again, there will be one proposal, but unlike combined insurances there is
only a single set of policy conditions, exceptions and warranties, thus the
‘package’ concept.
Because of the nature of the product, the policy will have built-in-limits and
underwriting safeguards. Whereas combined covers are individually
underwritten and rated, the package policy has pre-determined restrictions
in cover and sums insured, and have a totally different rating structure.
5. Practice in the USA
The practice of property insurance in the USA is characterised by certain unique

features. The commercial property coverages are provided under standardised
forms developed by Insurance Services Office, Inc. (ISO) or the American
Association of Insurance Services (AAIS) for their member insurance companies.
These national insurance advisory organisations also file these forms on behalf
of their members, with regulatory authorities in various states, as per law.
Along with the forms they also file the so-called manual rules which insurers
follow (e.g. eligibility, limits of insurance and calculation of premium), and
loss-costs i.e. that portion of an insurance rate representing projected losses
and the costs of settling those losses. Insurance rates are fixed by adding other
factors (e.g. insurers’ expenses of management, etc.) to the loss costs.
A common form used to insure Commercial Property known as ISO Business

Personal Property (BPP) coverage form is now outlined.

a) Property Covered
The broad categories of property covered are:
i. Building which is defined as the structure plus permanently installed

fixtures, outdoor fixtures property used to maintain and service the
building, such as fire extinguishing equipment, appliances for
refrigerating, ventilating etc.
ii. Business personal property which includes amongst others,
 Furniture and Fixtures

 Machinery and Equipment
 Stock etc.
iii. Property of others e.g., Leased Property or property under process, etc.
b) Additional Coverages
Business Personal Property
The BPP provides several supplemental coverages. Some examples are:
Machinery Loss of Profit Cover Debris Removal: The costs of removing debris
of covered property by an insured peril.
i. Pollutant clean up and Removal: The costs of extracting “Pollutants”

from water or land. This falls under public liability insurance but
property insurance provides a limited cover under the policy.
ii. Preservation of Property: To preserve property from loss or damage if it

is moved or temporarily stored elsewhere, accidental loss or damage is
covered for a limited period.
iii. Fire Department Service Charge: This is payment of a charge (up to a

limit) required by local ordinance or agreed to before the loss.
iv. Valuable Papers and Records: The cost to research, replace or restore
the information on lost or damaged papers and records including
electronic or magnetic media.
v. Off-Premises extension: Property temporarily stored away from the

insured premises.
vi. Outdoor property such as outdoor fences, radio and television antennas,
trees, shrubs and plants etc.
Note: These coverages are available up to limited amounts only.

c) Insured Perils
The perils covered under the policy depend upon the ‘Causes of Loss’ form
selected by the insured.
Three forms are available: Basic, Broad and Special forms.
Basic Form
The basic form covers:
i. Fire
ii. Lightning
iii. Explosion
iv. Windstorm or hail
v. Riot or Civil Commotion
vi. Smoke
vii. Aircraft or vehicles
viii. Vandalism
ix. Sprinkler leakage
x. Sinkhole, collapse
xi. Volcanic action
Some of these are explained hereunder:
i. Hail consists of ice particles created by freezing atmospheric conditions.
ii. Smoke refers to damage by smoke from a fireplace or furnace. These are
known as ‘friendly’ fires as distinct from ‘hostile’ fires which are
accidental fires. Smoke damage by the latter is covered by the fire peril.
iii. Vandalism is defined as “Willful and malicious damage to or destruction

of property”.
iv. Sprinkler leakage refers to leakage of any substance including water

from an automatic sprinkler system. It also includes the collapse of the
sprinkler tanks. The peril also covers the cost to repair or replace the
damaged parts of the sprinkler system if the damage results in sprinkler
leakage or is caused by freezing.
v. Sinkhole collapse is “loss or damage caused by the sudden sinking or

collapse of land into underground empty spaces created by the action of
water on limestone or dolomite”.

vi. Volcanic action is direct loss or damage resulting from the eruption of a
volcano when the loss or damage is caused by ash, dust or lava flow.
This is different from volcanic eruption which is excluded under the
earth movement exclusion along with earthquake. These two perils have
to be specially covered under separate endorsements.
Broad Form
The Broad Form covers the above 11 perils plus the following:
i. Breakage of glass: This covers breakage of building glass not covered by

some other named peril. Coverage applies to the glass itself and also to
property - cut or otherwise damaged by breaking glass.
ii. Falling objects (Example: branches of a tree, etc.)
iii. Weight of snow, ice or steel: This may cause damage to the roof or
other parts of the structure.
iv. Water damage: This refers to accidental leakage from plumbing or

appliances other than an automatic sprinkler system.
Exclusions
Both the Basic and Broad Forms contain exclusions. Some examples are:
i. Earthquake, volcanic eruption
ii. Flood (Cover is available separately under the National Flood Insurance
Program)
iii. Explosion of steam boilers.
iv. Mechanical breakdown, etc.
Special Form
The Special form is on ‘All-Risk’ basis and covers any accidental cause of loss
unless it is specifically excluded.
Under this form if the insured can prove that a direct physical loss has
occurred, the coverage applies unless the insurer can prove that exclusion
applies.

d) Amount of Claim Payable
The policy form contains provisions that determine how much the insurer
will pay for a covered loss. These relate to limits of insurance (equivalent to
our sum insured) the deductible, (or excess) and co-insurance (equivalent to
our pro-rata average condition).
The value of property covered by the BPP is determined at ‘actual cash

value (ACV)’. This is generally defined as “Replacement cost minus
depreciation”. Replacement cost is determined at the time and location of
the loss (This is almost equivalent to the market value’ concept used in
India).
Optional Valuation Methods are also available, for example:
i. Replacement cost without any deduction for physical depreciation.
ii. Manufacturers’ finished stock is valued at selling price less any

discounts or un-incurred expenses.
e) Commercial Package Policy
Another policy is Commercial Package Policy (CPP) which includes the

following coverage parts:
i. Commercial property
ii. Boiler and Machinery
iii. Commercial crime
iv. Commercial inland marine
v. Farm
vi. Commercial auto and liability
These coverages can be granted individually in a mono line policy or

combined in a package policy.
f) The other popular policies are Business Owners Package Policies for
Stores, offices, etc., Home Owners Package Policies, Condominium
Property Insurance Policies, etc.
Note: Condominium is roughly equivalent to cooperative societies in India.
6. Role and Significance of General Insurance Council
The General Insurance Council represents the collective interests of the Non-life
Insurance companies in India. The Council speaks out on issues of common
interest; helps to inform and participate in discussions related to policy
formation; and acts as an advocate for high standards of customer service in the
insurance industry.

General Insurance Council leads a number of initiatives by bringing together

experts from its member companies, the national re-insurers and the regulator
in a common forum for debating specific issues from time to time and helps
resolve them in a structured fashion.
Significant contribution in recent times has been the revision in deductibles in

fire and engineering products with common consensus avoiding the need to
approach IRDA individually and addressing insurance industry concern at the
same time.
Test Yourself 1
Complete the following sentence.
As per the rating pattern followed under the Petrochemical Tariff, the Fire and
Explosion rate for each plant, after application of all loading and discounts,
should:
I. Either be less than 65% of the basic rate or shall it be more than 165% of the
basic rate
II. Always be less than 65% of the basic rate
III. Always be more than 165% of the basic rate
IV. Neither be less than 65% of the basic rate nor shall it be more than 165% of
the basic rate

CHAPTER 11 SUMMARY
Summary
a) Risks covered under Petrochemical Tariff: Standard Fire and Special Perils
Policy shall be issued to cover manufacturing risks, storage risks and
miscellaneous blocks rateable under Petrochemical Tariff 2001
b) All premises and / or goods rateable are subject to the provisions of AIFT
unless otherwise specifically provided.
c) All risks falling under this Tariff have to satisfy minimum requirements
(related to fire protection and electrical installation) for granting cover
d) Applicable to Tank Farms: No tank used for storing Class A and B products
has a storage capacity exceeding 30,000 K. Litres
e) The Tariff classifies ‘Flammable’ materials into Classes A, B, C, D according

to their flash point.
f) Silent Risks: The risk is deemed silent only if all the hydrocarbon /
flammable materials / combustible materials have been removed and it has
been purged (i.e. all apparatus and piping have been thoroughly cleaned)
before the inception of silent period and would continue to be so throughout
the silent period.
g) Rating: The basic rate for each petrochemical plant is arrived at on the basis
of the following factors:
i. Properties of chemicals
ii. Quantity of flammable materials handled
iii. Type of each identifiable process / operation
iv. Temperature and Pressure
v. Material of construction
h) Excess Clause: The insurance does not cover 5% of the claim amount subject
to minimum of Rs. 5 lakhs resulting from each and every loss in material
damage insurance for all perils. The excess is applicable per event and per
insured.
i) All industrial risks (other than risks rateable under Petrochemical Tariff)
having overall Sum Insured of Rs. 100 crores and above in one or more
locations in India shall be eligible for Industrial All Risks Policy.
j) The cover in its widest form will include the following perils/covers:
i. Compulsory: Fire and All Special Perils, Burglary (free), Machinery

Breakdown / Boiler Explosion / Electronic Equipment Insurance, Fire loss
of profit (Compulsory)
ii. Optional: Machinery Loss of Profit cover
SUMMARY CHAPTER 11
k) Following clauses will have to be attached to the policy and the insured will
have to adjust or provide additional sum insured where applicable

ii. ‘Architects’, Surveyors’ and Consulting Engineers’ Fees Clause
iii. Designation of Property Clause
iv. Omission to Insure Additions, Alterations or Extensions Clause
l) Rating: Rates for this policy are based on:
i. The detailed Risk Assessment Report of the Engineer

ii. Deductible opted by the insured
iii. Claims experience
m) Sum insured: The policy in so far as it relates to Buildings, Machinery,

Furniture, Fixtures, Fittings and Electrical Installations shall be on
Reinstatement Value Basis only, while the Stocks shall be covered on Market
Value basis.
n) There is no Fire Tariff in the U.K. However, to have some uniformity, The
Association of British Insurers (ABI) has issued a book “The Recommended
Practices, Wordings and Procedures relating to Material Damage.”
o) The standard fire policy covers only Fire, Lightning and Limited Explosion.
p) “All Risks” Policy: This policy specifies the exclusions. All other perils are
generally covered.
q) Fixation of Sum Insured: Buildings, machinery, accessories, furniture,

fixture, fittings and electrical installation are advised to be covered on the
reinstatement value basis. The other clauses that are available are:
i. Escalation Clause
ii. Local Authorities Clause
iii. Cost of Erection
iv. Architects /Surveyors fees’ Clause
r) Combined Policies: It is a single contract policy utilising one proposal.

Whilst, however, it is written as one contract, each section or class of
insurance is underwritten and rated separately and will contain its own
conditions, terms, exclusions and warranties.
s) Package Policies: This will incorporate the following covers:
i. fire material damage;

ii. consequential loss;
iii. theft, money, glass;
iv. goods in transit;

CHAPTER 11 SUMMARY
v. employers’ liability;
vi. public/products liability;
vii. fidelity insurance (occasional);
t) Practice in the USA: The commercial property coverages are provided under
standardised forms developed by Insurance Services Office, Inc. (ISO) or the
American Association of Insurance Services (AAIS) for their member
insurance companies.
u) A common form used to insure Commercial Property known as ISO Business

Personal Property (BPP) coverage form
v) The BPP provides cover for broad categories of property and several
supplemental coverages
w) Insured Perils: The perils covered under the policy depend upon the ‘Causes
of Loss’ form selected by the insured. Three forms are available: Basic,
Broad and Special forms.
x) Commercial Package Policy (CPP) which includes the following coverage

parts:
i. Commercial property
ii. Boiler and Machinery
iii. Commercial crime
iv. Commercial inland marine
v. Farm
vi. Commercial auto and liability
y) The General Insurance Council represents the collective interests of the

Non-life Insurance companies in India. The Council speaks out on issues of
common interest; helps to inform and participate in discussions related to
policy formation; and acts as an advocate for high standards of customer
service in the insurance industry.

Answer 1
The correct answer is IV.
As per the rating pattern followed under the Petrochemical Tariff, the Fire and
Explosion rate for each plant, after application of all loading and discounts,
should neither be less than 65% of the basic rate nor shall it be more than 165%
of the basic rate.
Question 1
All industrial risks (other than risks rateable under Petrochemical Tariff) having
overall Sum Insured of ________ and above in one or more locations in India
shall be eligible for Industrial All Risks Policy.
I. Rs. 25 Crores
II. Rs. 50 Crores
III. Rs. 75 Crores
IV. Rs. 100 Crores
Question 2
The Petrochemical Tariff classifies flammable materials into classes according

to their flash point. Which of the below is correct with regards to flash point for
flammable material classified as Class C.
I. Below and up to 230 C

II. Above 230 C and up to 650 C
III. Above 650 C and up to 930 C
IV. Above 930 C
Question 3
The Industrial All Risks Policy covers compulsory as well as optional covers /
perils. Listed below are some compulsory covers / perils. List the odd one
(optional cover / peril) out.
I. Fire and All Special Perils

II. Machinery Loss of Profit Cover
III. Electronic Equipment Insurance
IV. Burglary (free)

Answer 1
All industrial risks (other than risks rateable under Petrochemical Tariff) having
overall Sum Insured of Rs.100 crores and above in one or more locations in India
shall be eligible for Industrial All Risks Policy.
Answer 2
For flammable material classified as Class C, the flash point is above 650 C and
up to 93 0C.
Answer 3
Machinery Loss of Profit Cover is an optional cover and not a compulsory cover
under the IAR policy.

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IC-57

FIRE AND CONSEQUENTIAL LOSS

This course is based on revised syllabus prepared with assistance of:

We also acknowledge Get Through Guides, Pune for their contribution in

G – Block, Plot No. C-46,

Revised Edition: 2014

ALL RIGHTS RESERVED

This course is the copyright of the Insurance Institute of India, Mumbai. In no

Published by: P. Venugopal, Secretary-General, Insurance Institute of India, G-

1 Basic Principles and The Fire Policy 1

2 Add On Covers and Special Policies 31

3 Fire Hazards and Fire Prevention 63

4 Erstwhile Tariff – Rules and Rating 91

7 Claims - Legal Aspects 169

8 Claims – Procedural Aspects 199

9 Consequential Loss Insurance - I 223

10 Consequential Loss Insurance – II 251

BASIC PRINCIPLES AND THE FIRE POLICY

A. Basic Principles and the Fire Insurance policy

IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 1

A. Basic principles and the Fire Insurance Policy

The business of effecting, otherwise than incidentally to some other class of

The definition above refers to “fire or other occurrence customarily included

i. social perils, e.g. riot, strike, etc.,

Fire Insurance contract may be defined as an agreement between the insurers

2 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE

Fire Insurance contracts are governed by the general law of contract as

i. Offer and acceptance

Diagram 1: Basic principle

IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 3

a) Utmost good faith

In insurance contracts, the legal doctrine of utmost good faith applies.

According to this principle the insured is also expected to act as if he is

The requirement of insurable interest gives legal validity to insurance

Absolute legal ownership affords a clear example of insurable interest. A

4 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE

A bank or a financial institution which has advanced money on the security of

Fire insurances are contracts of indemnity – that is, their object is to

The principle of indemnity means insured is indemnified only to the extent of

Similarly, for plant and machinery, market value is arrived at by deducting

IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 5

ii. Book Value

iii. Reinstatement Value (RIV)

Reinstatement value is the value at which the damaged property can be

Reinstatement value is different from reinstatement condition (condition

iv. Agreed value

Agreed value, is dependent on the type of property and the intention of

6 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE

Following are the bases on which sum insured can be fixed:

Property Sum insured

To sum up, the following points should be noted:

i. The sum insured is always to be fixed by the insured.

IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 7

The principle of subrogation is a corollary of the principle of indemnity. If

The principle of contribution which is also a corollary of the principle of

The principle of subrogation and principle of contribution are corrolories to

I Principle of proximate cause

8 IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE

Section I General rules and regulations

2. Standard Fire and Special Perils Policy

The policy form consists of

This clause consists of three parts: preamble, limitation of the sum

IC-57 FIRE AND CONSEQUENTIAL LOSS INSURANCE 9

Limitations of the sum insured