Fire Insurance

A standard fire insurance policy provides coverage for losses due to fire, lightning, explosion, etc.
However, certain risks and losses are specifically excluded to prevent misuse and limit the insurer’s liability.
Here are four losses that are not covered under a fire insurance policy:
1. Loss due to War and Nuclear Risks — Any loss or damage caused by war, invasion, civil war, or nuclear reactions is excluded.
These are extraordinary risks that cannot be calculated easily and are covered by separate special policies if needed.
2. Loss due to Riot or Civil Commotion — Unless riot cover is specifically added as an extension, damage due to riots, strikes, or acts of civil commotion is not covered under a basic fire policy.
This protects insurers from large unexpected liabilities during public disturbances.
3. Loss due to Theft after Fire — Fire insurance does not cover theft or burglary losses that may happen after a fire incident.
For example, if goods are looted from the premises after a fire breaks out, this loss must be covered under burglary insurance, not fire insurance.
4. Loss due to Spontaneous Combustion — Loss caused by self-heating, fermentation, or spontaneous combustion is generally excluded.
However, coverage for spontaneous combustion can be added by paying an extra premium and following specific conditions.
These exclusions ensure that only genuine fire-related losses are paid and help keep premiums reasonable.

The Average Clause is an important condition included in fire insurance policies to handle under-insurance.
It ensures that the insured does not claim the full amount if they have insured the property for less than its actual value.
According to this clause, if the sum insured is less than the actual value, the claim amount is reduced proportionately.
This prevents policyholders from paying lower premiums for under-valued cover and still expecting full compensation.
Example:
Suppose a factory building is worth ₹10,00,000 but the owner insures it for only ₹5,00,000.
A fire causes damage worth ₹4,00,000.
Applying the Average Clause: So, Thus, only ₹2,00,000 will be paid by the insurer due to under-insurance.
The Average Clause encourages correct estimation of property value for adequate coverage.

In this case, Ashok originally had an insurable interest in the factory when he took the fire insurance policy.
However, when Ashok sold the factory to Rakesh, his insurable interest in the property ended.
Since Ashok did not transfer the insurance policy to Rakesh, the policy is still in Ashok’s name.
But now, Ashok no longer suffers any financial loss if the factory is destroyed, because he is no longer the owner.
Rakesh, the new owner, does not have any coverage under the old policy because it was not transferred to his name.
According to the Principle of Insurable Interest, the insured must have an insurable interest in the subject matter both at the time of taking the policy and at the time of loss.
Since Ashok no longer has insurable interest, he cannot claim.
Rakesh cannot claim either, because he does not have a valid policy in his name.
Therefore, neither Ashok nor Rakesh can recover the loss.
This highlights the importance of transferring the policy when ownership changes to ensure valid cover.