NATURE AND SCOPE OF FIRE INSURANCE
NATIONAL LAW SCHOOL OF INDIA UNIVERSITY
Research Paper in Insurance Law Submitted By: Arvind Srinivas 1555 B.A., LL.B. (Hons.) 4th Year Date of submission: 16/05/2012
Table of Contents
Introduction
As a concept, insurance can be described as a contractual arrangement to mitigate any loss to property or life by way of monetary compensation. 1 Thus, a Fire Insurance Contract or Policy comes into existence when a person seeking insurance protection voluntarily enters into a contractual relationship with the insurer, usually an insurance company, to indemnify the insured against loss of or to property by or incidental to fire and or lightening, explosion, 2 or other such eventualities.
An insurance transaction primarily a contract and hence has been traditionally covered by the laws of contract. All insurance transactions are, however, typified by certain characteristics that include, the uberrima fide nature of the agreement, the existence of an insurable interest, the provision of indemnity to the insured and subrogation and contribution on the part of the insurer in favor of the insured. These characteristics hold them to be essentially different from any other contract of property and hence all insurance contracts and are governed by special principles of law. These principles that regulate insurance policies in India are contained in the Insurance Act of 1938 which covers most forms of Insurance policies in India.
From this above understanding, one can say that a fire insurance contract, in its strictest sense, is one whose primary objective is to secure the insured against loss or damage occasioned by fire and the insurer’s liability in such an occasion shall be Iimited by the sum assured and not necessarily by the extent of loss or damage sustained by the insured. Finally, in such an arrangement the insurer has no interest in the safety or destruction of the insured property apart from the liability undertaken under the contract. 3
1
2 3
David L. Bickelhaupt, General Insurance (10th Edn., Illinois: Richmond D. Irvin Inc., 1979), 235. Black, Black’s Law Dictionary , Bryan A. Garner Ed., (7th Edn., New York: West Group, 1999). Sumant Sud, “Sum Insured in the Standard Fire Policy”,31, 31 (1) Insrance Times (January 2011), 31-32.
Research Methodology
Aims and objectives
The main aim of this paper is to critically study the scope and nature of the fire insurance as insurance for property. The paper shall analyse the various aspects of fire insurance and the nature of cover it provides for the insured.
Scope and limitations
The scope of this project is mainly to deal with the ambit of and nature of how fire insurance policies work and operate in the Indian and global context with reference to important cases so as to make this understanding clear and lucid. The paper shall also make a clear study of the concept of proximate cause in respect to fire insurance policies in India. The primary limitation of the paper shall be the fact that the paper shall study fire insurance as a branch of general insurance as provided in the Insurance Act,1938, and would not be considering the impact of fire and related damages on property that would be falling under the ambit of marine insurance.
Research questions
The researcher has endeavored to deal with the following questions during the course of this project: •
What is Fire Insurance?
•
What is the nature of Fire Insurance as a type of General Insurance?
•
What is the scope and ambit of an insurance policy of fire insurance?
Sources of data
Primarily, secondary sources of material have been used to write this research paper.
Style of writing
The style of writing used in this research paper is critical and analytical.
Mode of citation
A uniform mode of citation has been used throughout the project.
I The Concept of Fire Insurance
1.1. Definition of Fire Insurance
According to Halsbury, fire insurance can be defined as follows 4, “ It is a contract of insurance by which the insurer agrees for consideration to indemnify the assured up to a certain extent and subject to certain terms and conditions against loss or damage by fire, which may happen to the property of the assured during a specific period.” A fire insurance policy is, thus, a contractual arrangement of uberrima fide or utmost good faith, whereby the person, seeking insurance protection, enters into a contract with the insurer to indemnify him against loss of property by or incidental to fire or lightning, explosion and so on. The fire insurance policy is, therefore, a policy designed to insure an individual’s property and other related and incidental items from loss occurring due to complete or partial damage by fire.
Fire insurance in India is regulated by the Insurance Act of 1938 and there is no specific legislation governing fire insurance in India. Section 2(6A) of the Insurance Act, 1938, defines a “fire insurance business” as “the business of effecting, otherwise than incidentally to some other class of insurance business, contracts of insurance against loss by or incidental to fire or other occurrence, customarily included among the risks insured against in fire insurance business.” The enactment primarily deals with the regulation of insurance business as such and not with any general or special principles of law relating fire of other insurance contracts. In the absence of any specific and dedicated statute on the subject, the Indian judiciary has relied heavily on the judicial opinions and decisions of the English Courts in dealing with the subject fire insurance.
1.2. Essentials of Fire Insurance
The following can be said to be the essentials of any fire insurance contracts:
1.2.1. Existence of an Insurable Interest The existence of an insurable interest is one of the fundamental necessities to enter into a contract of insurance. Any person who has an interest in a property so as to have a benefit from its existence and who can be prejudiced by a loss or destruction to such a property can be said to have an 4
Halsbury, Halsbury’s Laws of England (3rd Edn., London: Butterworths, 1969).
insurable interest in that property. Any person having such an interest in a property may insure such property against the eventuality of a fire.5 For a fire insurance contract based claim to exist, the insurable interest in the property must exist both at the at the time of entering into the contract and at the time of loss, the occurring of the fire. 6 In case the insurable interest does not exist at the commencement of the contract, the property cannot be considered as being legally insured. Similarly, if the insurable interest is absent at the time of the damage to the property the insured may claim no indemnity as he does not suffer any loss owing to the fact that he has no interest in the property that was damaged. 7 An excellent example of loss of insurable interest in a property is the sale of an insured property. Once such a sale has been concluded, the party may not claim any indemnity for a loss to the property by way of a fire as he loses his interest in the property at the time of the sale.8 1.2.2. Assumption of Risk by the Insurer An insurance contract is deemed to be concluded as on the issuance of the policy. This date is, usually, different from the date of acceptance by the insured party or the date of assumption of risk on the part of the insurer. Section 64-VB of the Insurance Act broadly provides that an insurer may not assume any risk associated with the insured property till the premium for the policy is received. The Insurance Rules, 1939, provides for the advance payment of premium amounts in lieu of s. 64 VB (1) which enables the insurer to assume the risks from the date of receiving of such advance premiums.9 In case the party insuring the property wishes to commence the insurance cover period from a date other than the one of issuance of the policy, he may negotiate with the insurer separately to provide for a different date for assumption of risks and the final position on the same is subject to the negotiation between the parties.10 This flexible approach has been adopted in law taking into consideration the fact that insurance is at its fundamental level a contractual arrangement where each party should be given the ability to negotiate and find the best solution for their interests to be
5
6
7
8
9 10
M.N. Srinivas, Principles of Insurance Law: Life, Fire, Marine, Motor and Accident (18th Edn., Nagpur: Wadhwa & Co., 2006), 135. L.R. Chandnani, “Loss of Profit Insurance (Fire), 41, 22(11) Insurance Times (November, 2002), 41-42. L.R. Chandnani, “Loss of Profit Insurance (Fire), 30, 22(09) Insurance Times (September, 2002), 30-31. L.R. Chandnani, “Loss of Profit Insurance (Fire), 37, 22(10) Insurance Times (October, 2002), 37-38. Rule 58, Insurance Rule, 1939. Robert I. Mehr et al., Principles of Insurance (7th Edn., Illinois: Richard D. Irwin Inc., 1980), 111.
best served.11
1.2.3. Determination of Damage The third essential of an insurance policy lies in the determination of the value of property damaged or destroyed by a fire for the purpose of indemnity under a policy of fire insurance. In this regard, it is the value of the property to the insured, which was to be measured. Traditionally, this value was measured by prima facie reference to the market value of the property before and after the loss. 12 This method was, however, not applicable in cases where the market value did not truly represent the real and actual value of the property to the insured. The measure of indemnity in such cases was the cost of reinstatement as was held in the case of Lucas v. New Zealand Insurance Company Limited 13. In this case the insured property was purchased and held as an investment for the purposes of income production by the insured party, and therefore the court held that the proper measure of indemnity for damage to the property by fire was the cost of reinstatement.
11
12 13
Mark S. Dorfman, Introduction to Insurance (2nd Edn., New Jersey: Prentice Hall Inc., 1982), 264. Avtar Singh, Law of Insurance (Lucknow: Eastern Book Co., 2004), 243-244. Lucas v. New Zealand Insurance Company Limited, (1983) VR 698.
II Characteristics of Fire Insurance
2.1. Nature of an Insurance Contract
A fire insurance policy does not exist to ensure the safety of the insured property, but to ensure that the policy holder does not suffer loss by reason of his interest in the insured property. Thus, if the insured property is transferred to another person, the contract of insurance also comes to an end. 14 Thus the fire insurance is not in relation to the property being insured but is connected to the policy holder as a person and cannot transfer automatically to the new owner to whom the property is being transferred.15 The contract of fire insurance is, thus, a personal contract between the insured and the insurer for consideration in the form of money and needs the the consent of the insurer before it can be validly assigned to another.16
2.2. Materiality of Cause
In fire insurance, the assumption is that a policy holder seeks to protect his property from any loss or damage which he may suffer upon the occurrence of a fire, however it may be caused. Therefore as long as the loss is due to fire within the meaning of the policy, it is, generally, immaterial what the cause of fire is.17 Consequentially, questions such as whether the fire occurred because the fire was lit improperly, or because the light was lit properly but negligently attended to thereafter or whether the fire was caused on account of the negligence of the insured or his servants or strangers is immaterial and the insurer is liable to indemnify the insured. Only the proximate cause of the loss is to be looked to, in the absence of fraud. 18
2.3. Insurance for the Entire Property
Fire insurance is usually for the entirety of the property unless expressly provided for. Thus , where the insured is guilty of breach of duty towards the insurer in respect of one subject matters covered by the policy , the insurer can avoid the contract as a whole, unless restricted by the policy.19
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16 17 18 19
P.K. Chopra, “Safety Orientation Reduces Fire Hazards in a Property”, 39, 24 (3) Insurance Times (March, 2004), 40. J.J. Williamson, General Fire Hazards and Fire Prevention (6th Edn., London: Pitman Publishing, 1972), 34. Supra note 1 at 274. Supra note 9 at 231. Malcolm A. Clarke, The Law of Insurance Contracts (4th Edn., London: LLP, 2002), 328. John Birds et al., Modern Insurance Law (7th Edn., London: Sweet & Maxwell, 2007), 142.
III Doctrines Applicable to Fire Insurance
3.1. Doctrine Of Subrogation
Subrogation is the substitution of one person in the place of another with respect to a lawful claim, demand or right against a third party, so that the substituted party succeeds to the rights of the other, or "stands in the shoes of" the other, with respect to the claim against the third party. A person's right to be subrogated to the rights of another generally arises when that person, acting pursuant to some obligation, pays the debt of the other.
The doctrine of subrogation is based on considerations of equity and good conscience and is granted as a means of placing the ultimate burden of the debt on the person who should bear it. The doctrine of subrogation has long been utilized by insurance companies who are obligated under their policies to pay their insureds for property damage or casualty losses which the insureds have sustained.
3.2. Doctrine of Contribution
Principle of Contribution is a corollary of the principle of indemnity. It applies to all contracts of indemnity, if the insured has taken out more than one policy on the same subject matter. According to this principle, the insured can claim the compensation only to the extent of actual loss either from all insurers or from any one insurer. If one insurer pays full compensation then that insurer can claim proportionate claim from the other insurers.
3.3. Doctrine of Reinstatement
The doctrine of reinstatement provides that the insurer, instead of tendering monetary compensation, can instead make good the loss incurred in kind. For example if one room in a house is damaged by a fire, the insurer can rebuild the room instead of providing the insured with the monetary equivalent of the damage caused by the fire.
3.4. Doctrine of Proximate Cause
This doctrine is extremely important in the light of fire insurance policies. The courts have more often than not upheld the doctrine of proximate cause more freely in torts as opposed to contractual disputes as the foreseeability of the resultant damage at the time of entering into contract often
restricts the scope of relief in contract law.20 Nevertheless, causa proxima plays a very vital role in the way insurance contracts, and especially fire insurance contracts, function. The doctrine of proximate cause states that when more than one threat act simultaneously or successively, it would be rather difficult, to asses the actual effect of each such threat on the property and to identify the ‘one-actual cause’ of the loss. In such a situation, the best way to determine the actual cause of the damage would be to identify the effective cause that has set “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” 21. This effective cause is called the proximate cause.
The prevalent opinion is that insurance contracts, being contracts of reimbursement for loss and not for actual performance, the parties are at a much better position to adjust the standards of performance and hence extending the scope of cover in an insurance contract beyond consequential events shall increase the risk faced by the insurer and would in the long run increase premium amounts.22 It should be understood that contracts of insurance are at a very essential level a two-way transaction where the insured is often at a weaker bargaining position and hence restricting the scope of insurance cover to ‘direct’ causes should effectively prejudice the insured. It is true that the Insurance Act, 1938, does not provide for a legal basis for claims based on proximate causes, however, a statute should be read considering its ambiguities and judicial interpretation should act like the handmaid of justice. The Indian position on the proximate cause in a fire insurance contract was laid down in the case of New India Assurance Company Limited v. Zuari Industries Limited 23 where the Supreme Court held that for a cause to considered a proximate cause, there should not be any break in the chain of causation between the initial event and the event immediate to the loss of property. Thus, the requirement under Indian law to establish a proximate cause is the clear chain of causation where there is no external involvement that interferes with or affects the chain of causation. Therefore, a damage that is by way of fire caused by lightening, explosion or implosion may be considered a proximate cause of damage. The essential test here is that these factors must ultimately lead to a fire and the fire must be the proximate cause of damage. 24
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21 22
23 24
“Proximate Cause”, as sourced from http://www.property-insurance-uk.net , as accessed on 7/5/2012. Pawsey v. Scottish Union and National Insurance Company , 482 All E.R. [1907]. Jacobs Sullivan, “Proximate Cause- Interpretation of Insurance Contracts”, 44 (5) 766, Columbia Law Review (September, 1944), 767-769. New India Assurance Company Limited v. Zuari Industries Limited, (2009) 9 SCC 70. Id.
IV Scope of Fire Insurance
It is obvious that the primary scope of the fire insurance policy is to insure a property from the damage that arises from a fire. However, fire insurance is an insurance policy whose ambit extends far beyond fires and often covers other events that may cause non-fire related damages to the property.25
4.1. Events Covered by the Policy
The following are events covered under a policy of fire insurance:
4.1.1. Loss Caused by Fire Traditionally, any destruction, damage or loss caused to an insured property by its own fermentation, natural heating or spontaneous combustion or its undergoing any heating is not considered damage by fire.26 A clear example to illustrate the same would be the instance of chemicals undergoing heat reactions in a factory causing a fire. 27 This is the rule of ‘friendly fire’28 as provided for under American law whereby a damage occasioned by the catching of fire of an object where the fire is intentionally kindled in a place where the fire is to be contained shall not be considered an insurable event.29 Thus, a catching of a fire of an object accidently left in a fireplace or an oven shall also not be considered an event where the policy can be used to cover the damage. 30 This position of law is based on the need for “forseeabilty” 31, where the insurer may not be expected to compensate the policy holder for a loss that he could foresee and, therefore, avoid. 32
4.1.2. Loss Caused by Lightning and Other Natural Disasters Lightning may result in fire damage or other types of damage, such as a broken chimney struck by lightning or cracks in a building due to a lightning strike. Both fire and other types of damages
25 26
27 28 29 30 31 32
Supra note 5 at 138. E.J. Macgillivray, Insurance Law: Relating to all Risks other than Marine (11th Edn., London: Sweet & Maxwell, 2008), 89. J.V.N. Jaiswal, Law of Insurance (Lucknow: Eastern Book Co., 2008), 178-179. “Friendly Fire”, as sourced from www.irmi.com, as accessed on 5/5/2012. Id. Way v. Insurance Company , Volume 166, Massachusetts Reports, 67. Colinvaux, Law of Insurance (8th Edn., London: Sweet & Maxwell, 2006), 23. Supra note 19 at 342.
caused by lightning are covered by the policy. 33 Storms, cyclones, floods, landslide, rockslides, and bush fires, accidental or otherwise34 are natural disasters that are covered by fire insurance policies.
4.1.3. Other Causes The loss or damage to property that is caused directly, by fire or otherwise, by an aircraft and other aerial devices is covered under the scope of a fire insurance contract. Similarly, damage caused by objects that are dropped from such devices is also covered within the ambit of the fire insurance policy.35 An exception to this rather broad and overreaching scope of fire insurance is with respect to any damage or loss caused to an insured property that is occasioned by pressure waves created by aerial devices that are travelling at supersonic speeds.36
Damage or destruction of insured property due to impact by a rail or road vehicle and an animal by direct contact with the insured property is covered under the scope of the policy as long as such vehicles do not belong to the insured or any person occupying the insured premises occupier or caused by their employees acting in the course of their employment. 37 Damages caused to a property by bursting of water pipes and apparatus, overflowing of water tanks, missile testing operations, leakage from automatic sprinkler devices are covered in the scope of a fire insurance policy. 38
Events not Covered by the Policy
The above discussion might create the impression that fire insurance is a one stop shop for almost all conceivable damage that can be caused to a particular property. This is, however, not true at all. Some events that the fire insurance policy does not cover include 39 1. Theft during or after the occurrence of any insured risks; 2. War or nuclear disaster; 3. Electrical breakdown; 4. Burning by an order of a public authority; 5. Subterranean fire; 6. Loss or damage to bullion, precious stones, artifacts, plans, drawings, money, securities, cheque books, computer records except if they are specifically included in the policy; and 7. Loss or damage to movable property moved to a different location. 33 34 35 36 37 38 39
K. Seethapathi et al., General Insurance (Hyderabad: ICFAI University, 2002), 56. Supra note 4 at 32. Supra 22 note at 180. Supra note 17 at 145. Supra note 12 at 124. Supra note 9 at 261. Supra note 5 at 146.
In addition, the act of any person taking part along with others in any disturbance of public peace, other than war, invasion, mutiny, civil commotion and so on, is construed to be a riot, strike or a terrorist activity. Unlawful action would not be covered under the policy.
Conclusion
The research paper is an attempt to provide a comprehensive view of the operation of fire insurance in India. The paper, while discussing the legal framework of the fire insurance policy and while examining the characteristics of the fire insurance contract, brought to the attention of the reader the fact that the insurance statute in India merely provides for a broad outline of the law and does in no way delve into the specifics of how the insurance is to operate. Thus, most of the legal norms that are non-contractual with respect to fire insurance are only customary practice in the industry or the result of judicial interpretation and decision making. Therefore, there are several legal questions which need to be answered to provide further clarity with respect to fire insurance.
The need for clarity in the law is most significant in the context of insurance laws and especially fire insurance as the risk, both direct and indirect, faced by the insured property cannot be clearly predicted. Thus, fire insurance starts off from a very uncertain position, an increase in the legal uncertainty severely prejudices the insurer, as he may be held accountable for losses to the property he could not foresee, and the policy holder, as the law may not indemnify him for damages that he thought was reasonable at the time of entering into the contract. This uncertainty is clearly visible in the case of causa proxima as the test in place is still not perfect and the final decision on the matter is dependent much on judicial judgement. Thus, an inconclusive test only adds to the complexities of the fire insurance contract.
As discussed before, any uncertainty in law with respect to the insurance discourages the insurer from insuring property and also effectively increases the premium amount to be payable by the insured. Thus, the need of the hour is for a more comprehensive fire insurance structure and is to streamline the legal standards that are to be applied in the case of fire insurance. Hence, a separate legislation that deals with the specific nature of the fire insurance contract in the lines of the Marine Insurance Act, 1963, would be the best possible solution to ensure clarity and predictability in fire insurance. Such a clear legal enactment can reduce the legal risks associated with a fire insurance policy, for all parties concerned.
Bibliography Articles
1. Jacobs Sullivan, “Proximate Cause- Interpretation of Insurance Contracts”, 766, 44 (5) Columbia Law Review (September, 1944). 2. L.R. Chandnani, “Loss of Profit Insurance (Fire), 30, 22(09) Insurance Times (September, 2002). 3. P.K. Chopra, “Safety Orientation Reduces Fire Hazards in a Property”, 39, 24 (3) Insurance Times (March, 2004). 4. Sumant Sud, “Sum Insured in the Standard Fire Policy”,31,
31 (1) Insurance Times
(January 2011).
Books
1. Avtar Singh, Law of Insurance (Lucknow: Eastern Book Co., 2004). 2. Colinvaux, Law of Insurance (8th Edn., London: Sweet & Maxwell, 2006). 3. E.J. Macgillivray, Insurance Law: Relating to all Risks other than Marine (11th Edn., London: Sweet & Maxwell, 2008). 4. Halsbury, Halsbury’s Laws of England (3rd Edn., London: Butterworths, 1969). 5. J.V.N. Jaiswal, Law of Insurance (Lucknow: Eastern Book Co., 2008). 6. J. Birds et al., Modern Insurance Law (7th Edn., London: Sweet & Maxwell, 2007). 7. K. Seethapathi et al., General Insurance (Hyderabad: ICFAI University, 2002). 8. M.N. Srinivas, Principles of Insurance Law: Life, Fire, Marine, Motor and Accident (18th Edn., Nagpur: Wadhwa & Co., 2006). 9. M. A. Clarke, The Law of Insurance Contracts (4th Edn., London: LLP, 2002).
Cases
1. Lucas v. New Zealand Insurance Company Limited , (1983) VR 698. 2. New India Assurance Company Limited v. Zuari Industries Limited , (2009) 9 SCC 70.
3. Pawsey v. Scottish Union and National Insurance Company, 482 All E.R. [1907]. 4. Way v. Insurance Company, Volume 166, Massachusetts Reports, 67.
Statutes
1. Constitution of India, 1950. 2. Insurance Act, 1938. 3. Insurance Rules, 1939. 4. Marine Insurance Act, 1963.
