top of page

There are a number of fire insurance policies to suit different interests. A number of factors are considered before deciding about the kinds of policies to be taken.

These factors are:

1. The type of risk involved.

2. The nature of the property to be insured.

3. The contents of the property.

4. Occupancy hazards.

5. Exposure hazards.

6. The time element.

The following kinds of policies are generally issued for fire insurance:

1. Valued Policy:

In this policy the value of the subject-matter is agreed upon at the time of taking up the policy. The insurer agrees to pay a pre-determined amount if the subject-matter is destroyed or damaged by fire. The principle of indemnity is not applicable to this policy. The agreed value may be more or less than the market value at the time of loss. These policies are generally issued for those goods or property whose value cannot be determined after their loss or damage. These goods may include works of art, jewellery, paintings, etc.

2. Specific Policy:

Under this policy the risk is insured for a specific sum. In case of loss of property, the insurer will pay the loss if it is less than the specified amount. It can be explained with an example: An insurance policy is taken for USD $ 50,000 and the value of the property is USD $ 80,000. If the property worth USD $ 40,000 is lost, the insured will get the whole amount of loss. If the loss is up to USD $ 50,000, it will be paid in full. In case loss exceeds USD $ 50,000, say it is USD $ 60,000, the indemnity will only be upto the amount insured i.e. USD $ 50,000. Under this policy the insured is not punished for getting a policy for lesser sum. The actual value of property is not taken into consideration.

3. Average Policy:

If the ‘average clause’ is applicable to a policy, it is called Average Policy. Average clause is added to penalise the insured for taking up a policy for a lesser sum than the value of the property. The compensation payable is proportionately reduced if the value of the policy is less than the value of the property.

Suppose a person takes up a fire insurance policy of USD $. 20,000 and the value of the property is USD $. 30,000. If there is a loss of property worth USD $. 50,000, the underwriter pays compensation of USD $. 10,000 (20,000/30,000 x 15,000) and not USD $. 15,000. It discourages the insured to get under-valued policy.

4. Floating Policy:

A floating policy is taken up to cover the risk of goods lying at different places. The goods should belong to the same person and one policy will cover the risk of all these goods. This policy is useful to those businessmen who are engaged in import and export of goods and the goods lie in warehouses at different places. The premium charged is generally the average of the premium that would have been paid, if specific policies would have been taken for all these goods. Average clause always applies to these policies.

5. Comprehensive Policy:

A policy may be taken up to cover up all types of risks, including fire. A policy may be issued to cover risk like fire, explosion, lightening, burglary, riots, labour disturbances etc. This is called a comprehensive policy or all risk policy.

6. Consequential Loss Policy:

Fire may dislocate work in the factory. Production may go down while the fixed expenses continue at the same rate. A policy may be taken up to cover up consequential loss or loss of profits. The loss of profits is calculated on the basis of loss of sales. A separate policy may be taken up for standing charges also.


7. Replacement Policy:

The underwriter provides compensation on the basis of market price of the property. The amount of compensation is calculated after taking into account the amount of depreciation. A replacement policy provides that compensation will be according to the replacement price. The new asset should be similar to the one which has been lost. The amount of compensation will depend upon the market price of the new assets so that it is replaced without additional cost to the insured.


8. Excess Policy

Sometimes, the stock of a businessman may fluctuate from time to time, and he may be unable to take one policy or a specific policy.

If he takes a policy for a higher amount, he has to pay a higher premium.

On the other hand;

if he takes insurance for a lower amount, he will have to bear the proportionate amount of loss.

The insured in this case can purchase two policies, one ‘First Loss Policy” and the second, ‘excess policy.’ The ‘First Loss Policy’ will cover that stock below which the stock never goes.

The minimum level of stock can be found out from the experience and for the other portion of stock which exceeds the minimum limit; he can purchase another policy called ‘excess policy’.

The actual value of the excess stock is declared every month. The amount of premium is calculated on the average monthly excess amount.

Since the chances of payment on the excess amount are very remote, the rate of premium is also very nominal.


The insured will pay a very nominal premium as compared to the premium payable on the total amount had the policy been a specific one. The average .clause also applies to this policy.



9. Declaration Policy

The excess policy contributes to only a rateable proportion of the loss because if the amount of excess stock exceeds the sum set in the excess policy, the businessman will not have a full cover owing to the average condition.

Moreover, if the First Loss Policy was also subject to an average condition, the assured will be at a loss. The declaration policy will give better protection in such cases where the stock fluctuates from time to time.

Under the declaration policy, the insured takes out insurance for the maximum amount that he considers would be at risk during the period of the policy.

On a fixed date of every month or a specific period, the insured furnishes a declaration of the amount. The premium is provisionally paid to 75% of the annual premium amount.


the annual premium is determined on the average of these declarations; If the premium is higher than the provisional premium already paid, the insured has to pay the difference to the insurer.

On the other hand, if the premium so calculated is lesser than the premium already paid, the excess is returned to the policyholder.

The declaration must be made on a specified day or within the next 14 days. Otherwise, the sum insured will be deemed to be the declared value. The policy applies only to stocks and the sole property of the insured.

The great advantage of this policy is that the premium is limited to the actual amount at risk irrespective of the sum insured. Unlike the excess policy, the premium is not unnecessarily paid.


the insurer may pay up to the sum insured throughout the policy because the premium amount can be adjusted accordingly.

The value of risks is an average of each day of the month or the highest value at risk during the month. Declaration policy is not available for a short period stock in process, stock at Railway siding.

Premium is adjusted at the expiry of the policy. The policy is very advantageous to those businessmen whose stocks fluctuate from time to time.

The amount of the declaration offers scope for fraud because the insured may pay a lesser premium by undervaluing the stock. Therefore, this policy is issued only to reputed concerns.



10. Adjustable Policy

The above disadvantage is removed by an adjustable policy. This policy is nothing but an ordinary policy on the stock of the businessman with the liberty to the insured to vary in his opinion; the premium is adjustable pro-rata according to the variation of the stock.

In the case of declaration policy, since the excess premium is refundable at the end of the year, the insured may put fire to the property.

This danger is avoidable in an ‘Adjustable Policy’. This is issued for a definite term on the existing stock.

The premium is calculated frequently and is paid in full at the inception of the policy.

Whenever there is variation in the stock, the insured informs the insurer. As soon as the information of variation is received, the policy is suitably endorsed and, the premium is adjusted on a pro-rata basis.

The policy amount will, thus, be changeable from time to time. The premium is also settled accordingly.

Difference between Declaration and Adjustable Policies

In case of declaration policy, the insurer’s liability is the insured amount, but in the case of an adjustable policy, the insurer’s liability is the value of the last declaration made.

The periodical declarations have no direct bearing on the measurement of indemnity in case of declaration policy, but these have been the basis of measurement of indemnity.

The advantage of the declaration policy over the adjustable policy is that in the former a margin of safety is present because the maximum amount insured is always at risk, but in the latter case, The cover is always for the declared value.

The declaration is, the case of declaration policy is meant only for ascertaining the average of the actual cover given throughout the year to arrive at the figure to which the actual premium will be calculated, but in the case of adjustable policy, the declaration is the basis of policy amount adjusted by endorsement.

The drawback of this policy is that the insured will have to deposit 75 percent of the premium fixed for the maximum coverage in the beginning although a portion of it is found more than the actual premium required for the full coverage, which will be returned at the end of the year.

In the case of adjustable policy, the premium is adjusted from time to time according to the variation of the risk and the liability of the insurer.



11. Maximum Value of Discount Policy

Under this policy, no declaration or adjustment of policy is required, but the policy is taken for a maximum amount, and the full premium is paid thereon.

At the end of the year, in the case of no loss, one-third of the premium paid is returned to the policyholder.

This policy is similar to the declaration policy where botheration of checking and recording declarations is avoided.

It serves as a rough and ready method of coverage for the maximum amount. This policy is not issued on all types of commodities and is confined only to selected commodities.


12. Reinstatement Policy

This policy is issued to avoid the conflict of indemnity, in other types of policies only the market value of the damage or loss is indemnified but, this policy undertakes to reinstate the insured property loss by fire to new condition irrespective of its value at the time of loss.

In other types of policies, in the case of building or machinery, the actual loss is arrived at by deducting the regular depreciation from the original cost of it. The amount of indemnity will be lesser than the amount to be spent in reinstating the property destroyed or damaged.

To provide full coverage, ‘reinstatement or replacement’ policies are issued.

Under this policy, the basis of settlement in the event of destruction is the cost of rebuilding the premises, or in the case of plant and machinery, the placement is done by similar machinery.

The reinstatement of the damaged property indicates the meaning of repair of the damages.

The restoration of the damaged portion of the property to a condition substantially the same as but not better or more extensive than its condition, at the time of its renovation.

The cost of the property when partially destroyed will not be more than the cost which would have been insured if such property has been destroyed.

The payment of the actual expenditure on the replacement will not be made until the expenditure has been incurred. This policy is also called ‘New for Old’ policy because the old property is replaced by new properties.

However, such policies are issued only on a building, plant, and machinery. This policy is not issued on the stock, merchandise or materials.

Each item of the insured property is subject to average. The policy provides a definite amount in case of purchase of new property in place of the old property destroyed.

The reinstatement Policy stipulates that reinstatement must be carried out by the insured to obtain the special basis of the settlement agreed.

The reinstatement must be commenced raid carried out with reasonable dispatch and in any case, must be completed within 12 months after the destruction or damage, or until reinstatement carried out and expenditure incurred, the liability under the policy remains on the normal indemnity basis.

The insurance by this policy intends to include such additional cost of reinstatement as may be incurred solely because of the necessity to comply with the building, etc. by any Act of Parliament, Municipal or Local Authority.

No additional premium is charged for the purpose. This policy does not cover any destruction or damage occurring before the granting of this extension.



13. Sprinkler Leakage Policies

This policy insures the destruction of or damage to by water accidentally discharged or leaking from automatic sprinkler installation in the insured premises.


The discharge or leakage of water due to heat caused by fire, repair or alteration of building nr sprinkler installation, earthquake, war, explosion are not covered by this policy.



14. Add on Covers Policy

An insured may like to cover his property against to delete some of the exclusions. The cover in respect of these perils is provided by the insurer by charging an additional premium.

This additional cover is effected by either deletion of some of the excluded perils or the addition of other specified perils.

The perils which are covered by an endorsement of the basic fire policy are collectively called Add-on Covers. For example, earthquake damage is added to the fire policy.

There are certain principles to add to covers. It is an extension of the basic standard fire policy. The liability shall in no case under the extension of the policy exceed the sum insured of the policy. All the conditions of the basic fire policy shall apply to the insurance granted by extension.

Add on the cover is mid-term inclusion but the annual premium has to be charged and not short period premium.

If the insured requests for the add on the cover to be canceled midterm the no refund of premiums for the cancellation will be allowed unless the entire policy is canceled.


15. Escalation Policy

This insurance allows an automatic regular increase in the sum insured throughout the policy in return for an additional premium to be paid in advance.

There are certain conditions for escalation insurance. The escalation of the policy amount shall not be more than 25 percent of the sum assured.

The additional premium payable in advance will be at 50% of the full rate. This policy applies to policies covering building, Machinery, and accessories only and will not apply to policies covering the stock.

The clause cannot be opted for during the currency of the policy but only at inception or renewal.

The effect of this policy/clause is to provide for a daily increase in the sum assumed based on the percentage selected spread throughout the policy;

It also allows an automatic regular increase up to 25% of the sum insured throughout the policy in return for an additional premium to be paid in advance.



Specialized Policies

Special policies for different risk exposed products are also issued specifically with their respective premium terms and warranties.

The important specialized policies are

  • petrochemical policy,

  • industrial risks policy,

  • machinery breakdown policy,

  • material damage policy,

  • business interruption policy,

  • engineering good policy,

  • electrical installation policy,

  • housekeeping policy,

  • mega risk policy and

  • consequential loss policy.

Valued Policy
Specific Policy
Floating Policy
Average Policy
Comprehensive Policy
Consequential Loss Policy
Replacement Policy
Excess Policy
Declaration Policy
Adjustable Policy
Maximum Value of Discount Policy
Reinstatement Policy
Sprinkler Leakage Policies
Add on Covers Policy
Escalation Policy
Specialized Policies
bottom of page