Standard Fire Policy

The standard forms

A fire policy covers loss of or damage to insured property caused by fire and a list of allied perils. The long-standing form in India is the Standard Fire and Special Perils Policy (SFSP). Since 1 April 2021 insurers must also offer three standard products designed by IRDAI: Bharat Griha Raksha for homes, and Bharat Sookshma Udyam Suraksha and Bharat Laghu Udyam Suraksha for small businesses.

Fire insurance is regulated under the Insurance Act, 1938 and the regulations and circulars IRDAI issues under it. Rates are set by each insurer. Occupancy is a major rating factor, along with construction, fire protection and claims history; a cotton ginning and pressing factory is typically rated among the higher-hazard occupancies.

What counts as fire

Insurance distinguishes a hostile fire from a friendly one. A friendly fire is burning where it is meant to burn, such as the fire inside a furnace, and damage it does there is not covered. A hostile fire is one that has escaped its intended confines, for example from the furnace to the factory floor, and it is what a fire policy covers.

Cover follows the proximate cause, the dominant and effective cause of the loss, not necessarily the last thing that happened. Damage caused by water used in fighting the fire, whether from hoses, sprinklers or fire-brigade operations, is treated as a direct consequence of the fire and is covered. If the chain was set off by an excluded peril, such as war, or earthquake under a classic SFSP without the earthquake extension, the exclusion applies.

What is left out

A fire policy pays for physical damage to the insured property by an insured peril. In the classic SFSP, theft during or after an insured peril is excluded, so theft generally needs a burglary policy. Some of the standard Bharat products give limited cover for theft in the days immediately following an insured event. Loss of business income while the property is repaired is not covered either; it needs a separate loss-of-profits policy. A fire deliberately set by the insured is not covered at all.

Under-insurance and the basis of settlement

The average clause applies when the sum insured is less than the actual value of the property. The claim is then reduced in proportion: claim = sum insured ÷ value at risk × loss. This is the classic SFSP rule. The standard Bharat products relax it: Bharat Griha Raksha waives under-insurance, and the two small-business products ignore a shortfall of up to 15%.

The sum insured can be fixed on one of two bases. On a market-value basis the claim reflects the depreciated value of what was lost. A reinstatement value policy pays the cost of rebuilding or replacing damaged property as new, without a deduction for depreciation, provided the property is actually reinstated and the sum insured was fixed on a reinstatement basis. It costs more than cover on a market-value basis.

Rules at a glance

Key points

• The SFSP is the long-standing fire form; since 1 April 2021 insurers must also offer Bharat Griha Raksha, Bharat Sookshma Udyam Suraksha and Bharat Laghu Udyam Suraksha.
• A hostile fire, one that has escaped its intended confines, is covered; a friendly fire is not.
• Water damage from fire-fighting is covered as a direct consequence of the fire.
• Under the classic SFSP average clause, claim = sum insured ÷ value at risk × loss.
• Reinstatement value cover pays new-for-old cost, provided the property is actually reinstated.

Common misunderstandings

• Not every fire is an insured fire: damage by a friendly fire burning in its intended place is not covered.
• The average clause is not the same in every product: Bharat Griha Raksha waives it and the small-business Bharat products ignore a shortfall of up to 15%.
• Reinstatement value cover does not pay new-for-old regardless: the property has to be actually reinstated and the sum insured fixed on that basis.

Questions people ask