Fire and Consequential Loss Insurance – Insurance Law and Practice Important Questions

Fire and Consequential Loss Insurance – Insurance Law and Practice Important Questions

Question 1.
What is ‘fire insurance’? What are the risks covered under ‘fire and special peril policy’?
Answer:
Fire insurance is a tariff product and the inclusion, exclusion and conditions of the risk thus is uniformaly applicable to all the policies irrespective of its being issued by any of the insurance companies. Normally the fire insurance is construed to the covering risk of fire peril only but the fire insurance policy issued under Indian Tariff covers other risks as well.

As the name ‘Fire and Special Perils’ suggest the standard policy covers the risk of fire and other names special perils. Some of the risks excluded under fire insurance can be written back as add on cover by paying additional premium. Thus ‘Standard fire and Special Peril Policy’ with the permitted ’Add on’ covers can also be issued.

Risks covered under Fire and Special Peril Policy are:

• Fire
• Lightening
• explosion/implosion
• aircrafts damage
• riot strike, malicious damage etc.

Question 2.
State the exclusions as regards a fire insurance policy.
Answer:
A Fire Insurance Policy usually does not cover a certain amount known as “Excess” under the policy. The policy also excludes damage caused by war and war like operations, nuclear perils, pollution or contamination, electrical/mechanical breakdown, burglary and house breaking.

Certain perils like earth quake and spontaneous combustion can be covered on payment of additional premium. Fire Insurance policies are issued for one year except for dwellings, where a policy may be issued for long term (with minimum period of three years), and the premium for the entire duration should be paid in advance subject to the discounts available as per the policy provisions.

Question 3.
What are the conditions precedent to and subsequent to a fire insurance contract? Discuss. (5 marks)
Answer:
Conditions are terms which prescribe the limitations under which an insurance policy is granted and which specify the duties of the assured. They can be either conditions precedent or subsequent. Conditions precedent are those, which are essential for the creation of a valid contract, the non satisfaction of which makes the contract void ab initio.

The Conditions precedents to a Fire Insurance Contract are:

• Offer
• Acceptance
• Lawful Consideration
• Consensus ad idem-(Mutual Consent)
• Competency to Contract
• Lawful Object
• Agreement

Conditions subsequent relate to the continuance of a valid contract, the non-fulfilment of which leads to the avoidance of the contract from the date of the breach. They can be further classified into express conditions and implied conditions. Express conditions which are expressly provided in the contract.

Implied conditions are those, which are implied by law to apply to every contract of insurance irrespective of any specific inclusion or referencp to them such as insurable interest, good faith etc. A condition, which seeks to reduce or curtail the period of limitation and prescribes a shorter pend’d than that prescribed by law is void.

However, the insured is absolved once it is shown that he has done everything in his power to keep, honour and fulfil the promise and he himself is not guilty of a deliberate breach. An insurer cannot take recourse to a condition, which has not been mentioned in the policy to reduce his liability. However, an insurance policy may not curtail the right but may merely provide for forfeiture.

The conditions subsequent to the contract in fire Insurance would be:

• Utmost Good Faith
• Insurable Interest
• Strict Indemnity
• Subrogation
• Contribution
• Proximate Cause.

Question 4.
What do you understand by condition of ‘average’ in a fire insurance contract? How does this operate? Explain.
Answer:

• The doctrine of average or average clause is forever applied in indemnity policies – primarily in property claims – fire and engineering.
• At the time of taking the policy the insured has to consider the value of the risk or subject matter of insurance -sum insured.
• He must ensure that the adequate value has been declared and insured.
• If at the time of loss, it is found that the sum insured is less than the actual value of the subject matter, then the proportionate or ratable portion of the claims would be payable.
• The insured would hence, be his own insurer for the difference.
• Insurance Contracts are strictly Contracts of indemnity.
• On the happening of an Insurance event-Fire the Insurer pays for the sum Insured or Market Value of the property whichever is less.

Hence, lithe sum insured of a property is ₹ 30 lacs and me Market Value of the same on the day of Fire was ₹ 35 lacs and if the property was damaged by fire to the extent of ₹ 28 lacs, than the liability of the Insurance Company would be = \( \frac{\text { Suminsured }}{\text { MarketValue }} \times \text { Loss }\)
i.e., \(=\frac{30,00,000}{35,00,000} \times 28,00,000 \) = 24 Lacs.
The owner of the property would be liable for the remaining ₹ 4 lacs and would be considered to be its own Insurer for the balance.

Question 5.
“The digital economy will make usage-based, on-demand and all-in-one insurance lifestyle products more relevant”. Explain the role and impact of technology in insurance business.
Answer:
Insurers today are negotiating a unique and complex environment. Competition is intensifying as non-industry entrants and fintech innovators provide increasing choice and raise consumer expectations of frictionless, personalised experience. The digital technologies that enable the experience continue to develop, bringing with them a data explosion. And for insurers that can derive deep insights from that data there are exceptional opportunities to enhance agility, grow profitable business and differentiate themselves from the competition.”

Yes, it’s true that at present the digital economy will make usage-based, on-demand and ‘all-in-one’ insurance lifestyle products more relevant. Customers will prefer personalized insurance covers instead of the one-size-fits-all products currently available. Today, more than 80 percent of the premiums collected by insurers are lost to distribution costs. Digital models will make intermediaries in the insurance value chain – marked by their excessive dependence on human effort. Flexible coverage options, micro insurance and peer-to-peer insurance will become viable options in the long run.

Reinsurers will provide risk capital directly to digital brands and regulatory frameworks will accommodate shorter value chains. Lifestyle apps will re-imagine the insurer-insured relationships. Application Programming Interfaces (APIs) will enable the creation of insights-driven offerings as they integrate data from multiple sources. Deeper understanding of customer behaviors will lead to more accurate risk assessments, personalized premiums and value on a sustainable basis for better customer experience and brand loyalty plus reduced false claims. Nowadays, insurance policy is being issued in digitalized manner and kept with repository.

Some of the areas where technology is going to impact in a big way include:
(i) Al and Automation for Faster Claims:
Robotic Process Automation (RPA) and Al will occupy center stage in insurance, driven by newer data channels, better data processing capabilities and advancements in Al algorithms.

(ii) Advanced Analytics and Pro-activeness:
Premiums will become highly personalized, enabled by new sources of. tech-enabled data such as internet of Things, mobile-enabled InsurTech apps and wearables. With the connected devices market poised to grow strongly in the next five years, Property and Casualty (P&C) insurers will be able to extract real-time and accurate data on the loss exposure of individual consumers. This will help them proactively respond with timely and highly personalized interventions.

(iii) InsurTech Partnerships:
InsurTech firms have been showing significant growth in the areas of auto, homeownership and cyber insurance. Such strong growth will stimulate traditional insurers to either acquire technology capabilities or partner with InsurTech companies. With an increasing demand for innovative products and services from millennial’s, such collaboration will become a critical imperative. Overall, it will be a win-win situation- traditional insurers will benefit from faster results in establishing a tech culture and InsurTech companies will get access to larger customer bases, funding and domain expertise.

(iv) Mainstreaming Blockchain:
The need for huge volumes of customer data to be processed in real time by different insurance functions calls for easy and secure transfer of data across organizations and their diverse stakeholders. Blockchain technology provides the advantage of secure data management across multiple interfaces and stakeholders without loss of integrity. Thus, technology is going to drive the insurance business in future, however, the key is to understand how and when to tap into this potential leveraging existing and new technologies.

Question 6.
Anup sells his house to Naresh and a fire occurs before the insurance on the house is cancelled. Can Anup claim the insurance amount? Give reasons in support of your answer.
Answer:
This case relates to the tinning of existence of insurable interest. In this case, Anup no longer has an insurable interest in the house at the time when the fire occurs. The insurable interest did not exist at the time of loss.

Question 7.
R Ltd. is a public limited company and is engaged in procurement of rice and its exports, in the course of its business, it utilised the godown facilities offered by the port authorities for storing rice bags awaiting shipment. Right from the commencement of its business, it has covered the risks under a fire insurance policy taken from a very reputed public sector general insurance company. The insurer has been servicing the account through one of its development officers. The policy period normally runs between the first of July of one year and the end of June of the subsequent year.

There were cyclonic storms and heavy rains on 22nd and 23rd July, 2010 resulting in severe flooding of the godowns of the port trust where R Ltd. had stored the rice bags awaiting shipment. On ceasing of the rains on 25th July, 2010, R Ltd. found that most of the rice bags stored in the port godowns had either been damaged or washed away. The doors of the godowns had been lifted and carried away by the rainwater and except for some clusters of rice grains found on the floors of the godown here and there, the entire stock of rice had been washed away. The insured immediately lodged a claim with the insurer asking for a compensation in terms of the fire policy.

On examination of the case, the insurance company noticed the following: The policy was due for renewal on 1st July, 2010. A notice for the payment of premium had been issued to the insured and served on it. The insured had drawn a cheque on 28th June, 2010 on its bankers for the insurance premium due on the basis of the premium notice and had handed over the cheque to the development officer servicing the amount, on the evening of 30th June, 2010.

This was duly acknowledged by the development officer, who also issued a cover-note for the oncoming period. The cheque was deposited by the development officer with the insurer’s branch to which he was attached on 17,h July, 2010 when he returned to the headquarters from his official tour. The branch officials deposited the cheque into the insurance company’s bank account on 18th July, 2010 and the bank credited the account with the premium on 25th July, 2010 because of the intervening public and bank holidays.

The regular policy for the year 2010-11 was not issued by the insurance company till the event of loss. The insured had enjoyed the cover with the same insurance company from the year 2003-04 and no major loss claim had been made R Ltd. so far on the insurance company.

On receipt of the claim papers from R Ltd., the insurance company’s claims department made an analysis of the same and sent a reply to R Ltd. rejecting the claim for the following reasons:

• The company was not on cover at the time of the loss, since no premium had been paid by R Ltd.
• The premium was received on 25th July, 2010 after the loss had occurred and hence no insurance policy can be granted.
• Loss due to floods is not covered under a fire policy.
• The cover note issued by the development officer did not bind the insurance company.

On receipt of this reply, R Ltd. approached you for advice on the resolution of the dispute. One of the methods suggested by R Ltd. was to proceed against the insurer before the Insurance Ombudsman. R Ltd. also felt that the IRDA could be approached directly for the resolution of the dispute.

Additional facts that may assist in the formation of your views are as follows:

• Goods stored in the godowns were 20,000 tonnes of rice whose cost of acquisition was ₹ 200 crore. The quantum of storage was supported by independent stock registers maintained by the port authorities.
• The District Collector of the area, who was appointed by the State Government as the Relief Commissioner, certified that all the goods in the godowns were lost in the floods and there existed no salvage.
• The stocks in the godowns carried an insurance cover for ₹ 250 crore.
• A public sector bank had advanced ₹ 80 crore against the stock in the godowns and on the date of flood loss, the outstanding loan amount was ₹ 75 crore. The bank has lodged independently a claim with the insurance company asking the insurer to pay the claim directly to it against the loan outstanding.

In the backdrop of the above information, make an assessment of the situation and give your opinion in detail on the following issues:
(i) Whether a cover for insurance existed on the day of the accident?
(ii) Whether the claim was covered in terms of a fire policy? Also indicate what type of losses are not covered under a fire policy?
(iii) Whether the IRDA can intervene in the matter, on behalf of the insured/bank for the settlement?
(iv) Whether the insured is entitled to any claim under the policy from the insurer?
(v) If the claim has arisen, specify the amount of the same.
(vi) Whether the insured company can approach the Insurance Ombudsman for the settlement of the claim?
(vii) Whether the lender bank has an insurable interest in the property and hence be a party to the claim settlement?
Answer:
This question brings into focus all the prospects of insurance claims management and requires a sound knowledge of principles and practice of insurance. Considering the various facts of the case, the answers to the various questions raised are given below:
(i) Whether a policy existed on the date of occurrence of fire:
First Feature:

(a) It is clear that on the facts of the case, there existed a fire cover. It is to be borne in mind that the company has been taking the Policy with this Insurance Company for over 20 years and had a fire cover without break for this particular risk.

(b) The company obviously was a reputed exporter and has extensively used the port facility for storage and dispatch etc.

(c) These facilities are run by independent statutory bodies and thus be trusted with the facts.

(d) The period for cover was to start on 1st July. A premium notice based on the existing policy coverage, terms & conditions was issued by the insurance company before the expiry of the existing policy and the client R has issued the renewal premium cheque for the same and handed the same to the development officer- an employee of the insurer and noting at its records.

(e) Development Officer is the employee of the Insurance company and thus an authorised representative.

(f) He had received the cheque on 30th June before the expiry of the current policy and also had acknowledged it by issue of a cover note pending issue of the policy document.

(g) The development officer is an authorised official to issue cover note and in fact it is part of his assigned duties to issue one, it is in clear position in law that a cover note is a valid document that brings into existence the relationship of insurer and insured between the parties and has a validity for 60 days by when the normal formalities of issue of a policy could be completed.

The Second Feature:
Is that the cover is not a new one but is only a renewal of the existing policy on the same terms as agreed to between the parties earlier. Hence, it is clear that there exists a contract between the Parties, a valid Insurance Contract between the two parties on the subject matter of cover.

The Third Feature:
To be noticed is the provision of Section 64VB of the Insurance Act which clearly stipulates the payment of premium in advance before commencement of the cover. Facts denote that the amount of premium was collected by the Development Officer of the Insurance company on 30th June, 2010 – a day prior to the opening of the next year of risk cover. The insurer lodged the cheque for collection on the same day but the banker credited the insured account only on 24th July due to intervening government and bank holidays.

Issue of a cheque and its collection were a part of normal commercial activities. Hence, it has to be concluded that the payment of the premium has been made by R in the normal course and Section 64VB’s demand has been complied with in all aspects.

Hence, all the pre-requisite for the coming into existence of a fire- policy has been satisfied and as on the date of the accident, a valid insurance cover existed in favour of R.

(ii) Whether claim was covered in terms of policy:
The cover that existed was a fire policy-prima facie a standard one. This policy normally, covers losses arising out of fire and special allied perils like as storms, floods, typhoon, earthquake, inundation, lightening, strikes and landslides. In the case of Standard Fire Policy with Special Perils covered, the risks of Storm, Cyclone, Flood, Inundation and Earthquake risks are covered on payment of applicable additional premium.

In the instant case, the cause for loss is damage due to storms flooding and consequent inundation, it is noticed that such a risk is covered under the standard fire policy, subject to other conditions being satisfied, the insurer is liable for the losses.

A standard fire policy usually does not cover losses on account of damages caused by war and .warlike operations, nuclear perils, pollution or contamination, electrical or mechanical breakdowns, burglary and housebreaking.

(iii) Whether R can approach IRDA for settling the issue:
1. The Act that established it has defined its powers under Section 14 and apart from other duties outlined in the section, the following is clearly indicated “to protect the interest of the policy holder with regard to settlement of claims and other terms and conditions”. .

2. This specific object of the IRDA has to be invoked by R to support his claims for IRDA’s intervention in regard to this matter if the insurer does not act fairly and reasonably in the matter. The fact outlined in the question clearly established on liability of insurance company towards R-claims whether there existed a policy. Whether fire perils covered flood losses etc. – and it will, therefore, be very appropriate if R approached IRDA seeking its intervention.

3. Whilst IRDA may intervene in this case and issue a direction to a public sector company, consider different on the part of R and the public sector bank which has lent money to R may result in IRDA deciding to intervene.

4. Past records establish the fact in an identical case, where a client has approached IRDA for its intervention when its long run of negotiation with a public sector insurance company did not result in any solution. After examining all the factors IRDA decided to intervene and passed an order directing the insurer to pay the claim.

5. The insurer not satisfied with the IRDA’s direction, took the matter in appeal to the court which clearly indicated that IRDA did have the powers and infact an obligation to intervene on behalf of the insured.

6. That step will not only be necessary to protect the interest of a policy holder but represented wholly and truly authority, obligation to control, nurture and develop the insurance industry.

(iv) Whether any liability accrued on the part of the insurer:
Yes, Insurers are liable for the loss as per the terms and conditions of the Policy because two important conditions have been fulfilled. Firstly there exists the policy coverage. Secondly the policy is valid as on the date of loss.

Thirdly, the loss occurred due to a peril covered under the policy issued. With the client/policy holder complying with all the required formalities, the insurer is liable for the loss.

The client has also informed the insurer of the accident immediately after it knew of its occurrence. Hence it has to be concluded that there existed a policy on the date of the event in terms of which a claim has to be settled.

(v) If the claim has arisen, the amount of the claim:
We have already noticed that under a valid policy in existence, a claim has arisen. It has to be assessed and the amount of compensation has to be determined. To assess the damage, the insurer has to appoint a surveyor who has to finalise his assessment to the insurer based on the documents submitted and facts of the case and this assessment will form the basis for settlement.

In the instant case, the loss has been established independently in that stocks those were in the garden 20,000 tonnes of rice had been verified by the stock record maintained by the Port Trust which is an independent statutory authority. Its certificate can be accepted prima facie. In addition, physical examination of the Godown established the fact that the entire stock at Godown had been either damaged or washed away due to the force of the storm coupled with heavy rain and there was no salvage at the godown. The district collector who also was the Relief commissioner had confirmed about the total loss of the stock. It is thus crystal clear that the entire stock had been lost. Hence this is a claim for total loss and accordingly the total cost of the stock is payable.

(vi) Approach to Insurance Ombudsman:
The establishment of Ombudsman at different parts of the country is a facility to enable insured to get an opportunity to settled outstanding issues at no cost. An insured can approach an Ombudsman with his case for settlement when the insurance company refuses to accept the claim or settle it at lower value than expected by the insured. The only . drawback to this facility is that commercial claims of more than ? 20 lakh cannot be referred to Ombudsman. In this case R cannot go to the Ombudsman to settle the claim since loss amount is above the limit. Alternative available is to move the Consumer Courts where no such limit of loss is fixed.

(vii) The interest of the lender bank:
The bank had advanced money to R on the stock held in Port godowns to the extent of ? 80.00 Crores and as on the date of loss had an outstanding of ? 75 crore due to it. This makes the bank as a Party with an insurable interest which will permit it to raise with the insured the question of the settlement of the claims. It will be within the rights of the bank to have the claim amount to the extent of amount of the loan outstanding, to be released to it.

Question 8.
Nilesh, a businessman took a fire insurance policy to cover stocks of oil seeds, oil cakes, etc., in a godown of Class I construction located behind Vile Parle Market, Mumbai for a sum insured of ₹ 7 lakh against fire with riot and strike cover with ABC Insurance Company Ltd. for the period 15th May, 2014 to 16th May, 2015. The insured remitted ₹ 1,255 through account payee cheque to the insurer as premium for the coverage. The cheque was acknowledged by the insurer and a cover note for the sum insured of ₹ 7 lakh was issued against fire with riot and strike coverage on 19th May, 2014 (17m and 18th May, 2014 being Saturday and Sunday). The cover note covering the risk in question was duly delivered to Nilesh on 20th May, 2014 by an authorised representative of the insurer. The cover note whilst describing the property in brief also indicated “Subject to terms, conditions and exceptions of the standard fire policy.” The policy however was not released by the insurer.

Unfortunately, on 22nd June, 2014, a fire occurred in the godown and resulted in damage to a part of the oil seeds and oil cakes. The fire brigade was summoned and the fire was put out after considerable effort. But by that time, a substantial portion of the insured’s stocks had suffered damages. The insurance company upon receipt of intimation, deputed a senior fire surveyor to carry out inspection and assessment of damages. The surveyor after detailed inspection and verification of records assessed the damages to the tune of ₹ 3.40 lakh on account of ‘spontaneous combustion’. The report was submitted to the insurer on 25,h July, 2014.

The insured, Nilesh, took-up the matter with the insurance company for compensation. The ABC Insurance Company Ltd. however on the basis of surveyors findings informed the insured that spontaneous combustion was an excluded peril under the standard fire policy and hence the insurance company could not admit its liability under the claim. This decision of the insurance company was conveyed to the insured in writing on 6th August, 2014.

Being not satisfied with the decision of the insurance company, the insured, Nilesh took-up the matter with the ‘consumer forum’ for redressal stating that the cover note issued to him did not have a stipulation that ‘spontaneous combustion’ was an excluded peril under the standard fire policy and in the absence of such a condition, his rightful claim for compensation cannot be rejected by the insurer. Moreover, the policy too had not been released by the insurer even after a month and hence the claimant was completely in the dark with regard to terms, conditions and exclusions of a standard fire policy. The insured, therefore, cannot be penalised for ‘no fault of his own.’

The insured further contended that there was ‘deficiency in service’ on the part of the insurer in not releasing the policy document in time and in keeping the insured fully informed of the coverage.
The consumer forum heard arguments from both the parties including those advanced by the respective advocates on both sides. They also questioned the surveyor at length who had carried out loss assessment of the damages sustained by the insured.

The consumer forum after due deliberation amongst its members, directed the insurance company to pay the claim to the insured to the tune of ₹ 3.40 lakh as assessed by the surveyor.
The consumer forum further directed the insurance company to pay an additional amount of ₹ 30,000 for ‘deficiency in service’ in not releasing the fire policy within a reasonable period of 30 days.
Answer the following question:
(a) Discuss in detail how far the award of the consumer forum is justified in the light of the terms and conditions of the standard fire policy.
(b) Was the penalty for ‘deficiency in service’ imposed on the insurer justified in the light of existing guidelines in the market wherein there is no stipulation on issuance of a policy by the insurer within a reasonable period of 30 days ?
(c) What are the additional perils that can be covered under a standard fire policy?
(d) What do you understand by ‘condition of average’ in a fire insurance contract?
(e) Name the ‘excluded perils’ under a fire policy.
(f) Can a fire policy be issued providing coverage for more than one year?
Name the subject matter along with the period for which such cover can be granted ?
(g) Mention the ‘implied conditions’ in a fire insurance contract.
Answer:
(a) Fire insurance contracts are contracts of utmost good faith. Utmost good faith implies that there should be good faith on both sides – not only on the side of the insured but also the insurer should observe it strictly. In the given case are clear. A policy was taken against fire and riot. Strike risks for sum insured of ₹ 7 lakhs. The good insured was stocks of oil cakes and oil seeds in a class I godown located behind parle market, Mumbai for ₹ 7 lakh.

The cover note was issued by ABC Insurance Company covering the risk from May 15, 2014 to May 16, 2015. A representative of the insured delivered the cover note personally on May 20, 2014. He should have advised the insured that the commodity is susceptible to spontaneous compensation and therefor this risk too should be taken. But he did not do so.

The policy too was not released within a reasonable period of a month. On June 22, 2014, a fire occurred and damages were assessed by a senior surveyor to the tune of ₹ 3.40 lakhs. The cause of loss was spontaneous combustion.

The insured took the matter with the insurance company. The company denied its liability stating that spontaneous combustion was an excluded risk. The matter thereafter went to the consumer forum which gave an award against the insurance company for ₹.3.40 lakh.
1. On a review of the above facts, it becomes clear that the insurer was neither proactive nor sensitive to the needs of his client. Had he been a real friend and advisor, he would have advised the insured to take spontaneous combustion risk on may 20, 2014 itself when his representative met the insured and handed him the cover note.

2. He did not do so, nor released the policy document timely so that the insured may take precaution even belatedly.

3. He just acted as an insurer forgetting that insurance is peoples business. You are dealing with the people and hence you have to be proactive and sensitive to their needs.

4. As, insurance is the subject matter of solicitation, the representative should have advised the client with regards to the coverage.

5. However, in the above case, although a cover note is binding on the insured, since there is a lapse on the side of the insurer, the . consumer forum’s award is timely, fair and justified.

Alternate Answer:
(a) The operative clause of the cover note of fire insurance generally reads as follows.
“In consideration of the proposer named in the schedule hereto having, proposed to effect an insurance against fire for the period therein, on the usual terms and conditions of this company and having paid the premium stated 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 fire 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 though the insured being unacquainted with them shall not excuse his failure to act in accordance therewith and by the acceptance oh this Cover Note, the proposer binds himself by the terms and conditions of this company’s policy.”

The operative clause of the fire policy provides coverage in respect of fire but excludes damages caused to the insured property by “its own fermentation, natural heating or spontaneous combustion.”
However, extension endorsement in the fire policy covering spontaneous combustion can be obtained by the insured on payment of additional premium.

In the above case the insured failed to make an application to the Insurance Company for, a copy of the terms and conditions of the policy. Thus, it is a failure on the part of the insured and not the insurance company. Ignorance of the terms and conditions of the policy on the part of insured is not an excuse. Moreover, extension endorsement and add on cover for spontaneous combustion is available to the insured only on payment of additional premium by the insured before coverage of the risk. But in this case no such additional premium was paid by the insured to the insurance company. Thus, the insurance company is not liable to pay for the loss due to spontaneous combustion.

In the above case, the award of the Consumer Forum for payment of claim to the insured to the tune of ? 3.40 lakh as assessed by surveyor is not justified.

(b) Cover Note is a temporary document evidencing the receipt of premium and acceptance of the risk by the insurer, pending preparation and issuance of fully worded insurance policy. Usually the cover note is issued for a temporary period of 30 days and beyond this period the cover note becomes invalid and has to be replaced by a fully worded policy document.

For the insured, the Cover Note is the evidence that the risk he proposed for insurance is covered against the peril he desired. The insurer issues the fully worded policy once he receives the full details required for underwriting the risk, including documents like completed proposal form and all other relevant information required in documentary form like inspection reports etc.

If the issuance of fully worded insurance policy by the insurance company (even after receipt of ail necessary documents from the insured) is delayed beyond the reasonable period of 30 days, then the insurance company will be liable for deficiency of service.

Therefor, the decision of the consumer forum in awarding a penalty for deficiency in service is fully justified.
(c) The additional perils or add on covers are extension of fire policy which can be covered on payment of additional premium and by attachment of endorsements.

These add on covers include:

• Spontaneous combustion
• Earthquake (Fire and shock)
• Forest fire
• Architect, etc. fees (in excess of 3%)
• Debris removal (in excess of 1% of claim amount)
• Terrorism
• Temporary removal of stocks
• Leakage and contamination cover
• Spoilage material damage cover
• Deterioration of stocks in cold storage premises due to power failure following damage due to an insured peril.
• Impact damage due to insured’s own vehicles, Forklifts and the like and the articles dropped therefrom.
• Loss of rent
• Insurance of additional expenses of rent for alternative accommodation
• Start up expenses.

1. Fire insurance contracts are strict contracts of indemnity.

2. In other words, the insurer is supposed to indemnify the insured to the extent of loss suffered by him and not more than the loss.

3. Indemnity implies making good of actual loss.

4. The aim of the principle of indemnity is to place the insured in his pre-loss financial position and not to make a gain out of a loss.

For example, if a property is insured for a certain amount and later on it transpired that the market value of the property was much on the higher side and in case an accidental fire occurs, then the insured will be his own insurer for the accidental partial loss suffered by him. This is also known as under insurance or self-insurance.
formula:= \(\frac{\text { Suminsured }}{\text { Market value }} \times \text { loss }\)
For example, if sum insured is ₹ 2 lakh and the value of the property on the day of loss was ₹ 2.75 lakh. If the loss assessed for partial damages is ₹ 1.25 lakh, then the liability of the insurance company would be as under:
= \(\frac{2,00,000}{2,75,000} \times 1,25,000\)
= Loss payable ₹ 90,909
The insured would be his own insurer for the balance amount of loss. In other words, he has to bear a loss of ? 34,091 out of his pocket.

(e) The excluded perils under a Fire Policy are discussed below:

• Loss or damage caused by war and war like operation
• Nuclear perils
• Pollution or contamination
• Electrical/mechanical breakdown
• Burglary and house breaking
• 5% of each and every claim – Subject to a minimum of ? 10,000 in Act of Gods (AOG) perils, ? 10,000 for each and every loss out of other perils
• Loss, destruction or damage caused to bullion, precious stones, works of art exceeding ? 10,000, books of accounts, paper money, explosives etc.
• Stocks in cold storage
• Any electrical/electronic machinery
• Loss of earnings, loss by delay, consequential loss etc.
• Loss/damage by spoilage, interruption/ cessation of any process
• Loss by theft during or after the peril
• Loss by natural calamity.

(f) Fire insurance policies are normally issued for one year only. Only in the case of residential dwellings, the policy may be issued for a longer term. In such an eventuality, the policy may be issued for a minimum period of 3 years, however with payment of premium in advance.

(g) Conditions are of two types (i) Express condition (ii) Implied condition. While express conditions, are those that are normally specified on the face of the contract, and printed on the policy document, implied conditions are those, which are so basic and material that their existence forms the very basis of the policy.

In the absence of express conditions, the insurance contract is subject to implied conditions, which relate to:

• Utmost good faith
• Insurable interest
• Indemnity
• Subrogation
• Contribution
• Proximate cause

Question 9.
Anil, an individual, has taken with Urban Insurance Co. Ltd., a fire policy against his residential property, for a sum assured of ₹ 3,00,000. The cover lasts till the end of September, 2015. On 20th May, 2015, an accidental fire takes place and the entire building is gutted and damaged. Anil prefers a claim with the insurance company. The claim is rejected on the ground of negligence on Anil’s part. Representations made by Anil to the insurer against such a rejection were not successful. What options are left to Anil to proceed further in this regard? Discuss.
(b) Southern Ltd. carries a large volume of stock. It has secured fire policies to cover the stocks from three general insurers, the details of which are as under:
Insurer Sum Assured
M Insurance Co. Ltd. – ₹ 75,00,000
N Insurance Co. Ltd. – ₹ 50,00,000
S Insurance Co. Ltd. – ₹ 25,00,000

On 31st January, 2015,-when a fire, took place the value of the actual stocks in the godown, on the basis of the company’s accounts was ₹ 1,60,00,000. Salvage gained was ? 1,50,000 which the company recovered and realised by way of sales. .

Determine the individual liability of each of the insurers on the premise that the claim was admitted by the companies.
Answer:
(a) This question deals with dispute resolution between an insured and insurer. It is a case where an individual has insured a non- commercial building qgainst fire losses for ₹ 3,00,000. A fire takes place and the building is completely gutted and destroyed. In other words, the property is completely lost and there is a total loss. The insurer, on receiving a claim has denied it on the ground of negligence on the part of the insured.

The avenues open to Mr. Anil to resolve the disputes are discussed below:

• He can approach the Consumer Disputes Redressal Forum established by a State Government in each district of a State. These forums deal with cases of a value of upto ₹ 20,00,000 rupees.
• The forum has the power of a Civil Court. The forum can order and provide relief to the complainant.
• For insurance related claims, an additional separate window has been provided in the shape of insurance ombudsman who has been empowered to look into insurance related cases from non-corporate persons when the claim amount does not exceed ₹ 20 lakhs.

A person who wants to approach the ombudsman must have approached first the insurance company and must have gone through the procedure regarding complaint redressal mechanism in house by the company.

After hearing both the insurer and the insured, the Ombudsman will make his recommendation within one month from the date of receipt of the complaint. This will be followed by a trial order within three months. The Ombudsman’s order will be binding on the insurer but if the insured was not satisfied with the order he can choose to appeal against it. The insurer, within 15 days of the Ombudsman order shall comply with it. The individual can also appeal against the award pronounced by the Ombudsman if he is not satisfied with the judgment in the Consumer forums.

In the above case, the fire accident took place on May 20,2015 and on the insured reporting to in-house grievance facility, the insurer rejected the claim. Anil has now two choices before him. As the loss is less than ₹ 20 lakh, he can either approach the District Consumer Forum or go to the insurance Ombudsman. The claim before the Consumer Forum will be civil litigation and will be time consuming. If Anil approaches the insurance Ombudsman, the settlement process is quick around three or four months and if Anil at the end of the proceedings is not satisfied with the Ombudsman’s award, he can seek alternative remedies, like Consumer Forum, High Court, etc.

Therefor, will be prudent for Anil to go to insurance Ombudsman with the complaint. The cost of litigation will also be very low before the Ombudsman.

(b) This question calls for an inter-say allocation of liabilities amount different insures have insured. The main idea of an insurance contract is to indemnify the insured, against losses. The insured cannot gain out of a loss and hence the claim will have to be settled on pro-rata basis by all the three insurers collectively as per their sum insured liability ratios. As there are three insures, the liability to settled claims has to be distributed ratably.

The claim amount has to be calculated applying the ‘SUE’ clause in the order namely:
S – Salvage
U – Under-insurance
E – Excess
The distribution will be as under:
The actual stocks at the time of loss were ₹ 1,60,00,000.
Insurance covers available are ₹ 75 lakh + ₹ 25 lakh + ₹ 50 lakh = 1.50 crore.
There is under insurance.

The loss has therefore to be limited to the maximum of the same assured under the policies.

Maximum Allowable ₹ 1,48,50,000 to be distributed among M, N & S in the ratio of 3:2:1 viz. after adjusting for under insurance clause.
The stocks were insured only to the value of ₹ 1,50,00,000 i.e. upto a value of 93.75%. Hence, the amount payable is to be adjusted for under insurance after adjustment of salvage, and Excess of ₹ 10,000.

Therefore 93.75% of ₹ 1,48,50,000 = 1,39,21,875 which is to be divided amongst the three insurers in rateable proportion after excess adjustment.

(5% of every claim subject to a minimum of ₹ 10,000 is taken as mandatory excess)
Balance Amount of loss payable = ₹ 1,39,11,875
Loss payable ₹ 1,39,11.875 to be distributed among M, N & S in the ratio of 3:2:1 (Based on the respective contribution of M, N and S in the Sum Assured)
M Insurance Co. Ltd. , 316 of 1, 39, 11, 875 or ₹ 69,55,938
N Insurance Co. Ltd. , 2/6 of 1, 39 ,1 1, 875 or ₹ 46,37,292
S Insurance Co. Ltd., 1/6 of 1, 39, 11, 875 or ₹ 23,18,645

Question 10.
Hari took a fire insurance cover on his stock of oil-seeds, oil-cakes, etc., while stored in a godown of Class-I construction, for a sum assured of ? 1,50,000 with Zenith General Insurance Co. Ltd. The risk was inspected by the insurer’s representative. After the inspection, he collected the premium due and issued a cover note. The official receipt for the premium was received after three days by Hari. The cover note issued by the insurer’s representative indicated that “the stock of oil-seeds and oil-cakes, etc. are covered for a period of 12 months effective from 26th February, 2015, subject to terms, conditions, exceptions, etc. of the insurer’s printed policy against the risk of fire whilst stored in a godown of Class-I construction.” Despite several written requests and reminders by Hari, the policy document was not issued till the end of May, 2015. In the meantime, on 10th May, 2015, a major fire broke out in the godown damaging a large part of the insured’s stock.

The insurer appointed a licensed surveyor who assessed the loss of oil-seeds and oil-cakes to the tune of ₹ 1.15,000. He also held that the fire was on account of ‘spontaneous combustion.
In the course, Hari filed a claim for loss with the insurer. Zenith Insurance Co. Ltd. informed him that the fire having occurred due to an excluded peril, viz., spontaneous combustion, no claim would be payable.
How will you advise Hari to proceed to support his claim? Discuss in your answer, the sanctity of a cover note issued by an insurance company or its representative.
Answer:
Since the claim lodged by Mr. Hari has been turned down by Zenith General Insurance Company on the ground that “Spontaneous Combustion” is not covered under a standard fire policy, he can take up the matter with insurance ombudsman of his state and file a complaint with that office. The ombudsman is an internal redressal machinery of insurer created by the industry with the backing of the Central Government. The decision of the ombudsman is binding on the Insurance Company but not the claimant. The ombudsman would look into the entire matter of issuance of cover note by the insurer without any stipulation and give the benefit to the claimant.

The very fact that there was no warranty stipulated in the cover note strengthens the case of the claimant and benefit of doubt must go in his favour.
If Mr. Hari still does not get justice, than he can approach the District Forum and State Forum for redressal of his grievance.

A Cover note is a temporary risk document issued by the insurer till it is replaced by a stamped policy document. Insurers all over the world honour this document. The cover note describes the risk proposed for insurance and also stipulates conditions which are relevant and necessary.
In the present case, since no warranty pertaining to “Spontaneous Combustion” being an excluded Peril was incorporated in the Cover note issued by the insurer, he cannot disown his liability under the claim at this stage. The claim will have to be honoured by the insurer.

Question 11.
Kishore, owner of Jeevan Brothers, a business enterprise, had taken two insurance policies from a general insurance company on his factory located in Goa. One was a fire policy and the other was a consequential loss of profit due to fire policy.

On 8th January, 2015, early morning around 3.00 A.M., there was a short- circuit in the main switch-board in the sub-station receiving power from the State Electricity Board which resulted in a f lashover producing over-currents. The flashover and over-currents generated excessive heat which caused the paint on the panel board to be charred, producing smoke and soot thereby causing a hole to develop in the adjoining feeder. The smoke and soot alongwith the ionized air travelled to the generator compartment where again a short-circuit took place resulting in the tripping of the generator.

This resulted in the entire power supply to the plant being stopped and due to this, the supply of water/steam to the waste-heat-boiler by the flue gases at a high temperature continued to be fed into the boiler resulting in damage to it.

Kishore had the losses examined which were calculated at:
(i) ₹ 1,35,17,709 for material loss due to damage to the boiler and other connected equipments; and
(ii) ₹ 19,11,10,000 as loss of profits for the period during which the plant had to be shut down due to the accident.
He had intimated the insurance company of the accident and loss in due time and subsequently made a claim under the two policies on the insurer. He had sent alongwith the claim, the surveyors’ reports. The insurance company rejected the claim holding that the loss did not occur due to fire. Hence, Kishore took the matter to the National Commission under the Consumer Protection Act, 1986.

Before the National Commission, the insurance company reiterated its stand that the damage to the boiler and other equipments was not caused by fire but because of stoppage of electricity due to short-circuit in the switch-board, resulting in stoppage of power leading to a thermal shock. It stated that the proximate cause had to be seen for settling a fire claim which in the present case was the thermal shock due to stoppage of power. The National Commission, on examination of the facts, did not agree to the insurer’s arguments and decided in favour of Kishore.

The insurer not satisfied with the National Commission’s decision carried the matter further to a legal forum where again the counsel laid stress on two issues, viz., (a) there was no fire; and (b) in any case, fire was not the proximate cause for the damage.

The counsel for the insured relied on the decision of the National Commission and argued that it was necessary to determine first whether there was a fire. Admittedly in this case, there was a short-circuit causing a flashover. A flashover is the near simultaneous ignition of all combustible material in an enclosed area. When certain materials are heated, they undergo thermal decomposition and release flammable gases. Flashover occurs when the majority of surface in a space is heated to the auto-ignition temperature of flammable gases.

In the present case, it was noticed that the short-circuit in the main switch board caused a flashover. According to one of the two surveyors, this flashover should be defined as a phenomenon of a developing fire (or radiant heat source), radiant energy at wall and ceiling surfaces within a compartment. In the present case, the paint got burnt due to the flashover and such high energy levels would, undoubtedly, result in a fire causing melting of the panel board.

The second surveyor admitted that fire of a short duration could not be called a ‘sustained’ fire as contemplated by the insurer. In his view, the duration of fire was not at all relevant so long as there was a fire causing damage to the asset. The claim was maintainable even if the fire was for a fraction of a second. The counsel reiterated that the term ‘fire’ in the fire policy was not qualified by the word ‘sustained’ and the Appellate Court should bear in mind the basic proposition of law that a court should not add words to the statute or to a document and the policy must be read as it was. The counsel, therefore, stated that the insurance company’s argument that there was no ‘sustained’ fire in this case and hence the claims were not admissible was basically incorrect and wrong.

The Court after hearing both the parties agreed to the argument that what was to be decided in this case, whether the loss to the property was caused by ‘fire’ and not ‘sustained’ fire. It had been clearly established in the case and also supported by the reports of the two surveyors that there was a flashover in this case resulting in a fire of whatever limited time that had caused the blackening of the switch-board and the consequent loss to the boiler and other equipments. Had the fire not occurred, the damage would not have occurred and that there was no intervening agency that was an independent source of the damage to the plant.

The Court also referred to the decision in General Assurance Society Ltd. v. Chandmull Jain and another [AIR 1966 SC 1644] where it was laid down by the Constitution Bench that in case of ambiguity in a contract of insurance, the ambiguity should be resolved in favour of the insured and against the insurance company.
The insurer had not questioned the quantification of losses by the surveyors. The Court, therefore, felt that the claims under the two policies were allowable in favour of Kishore and consequently dismissed the insurance company’s appeal.

On the basis of the above facts and information, answer the following questions:
(a) Is the insurance company justified in rejecting the claim? What are your views on Kishore’s claims?
(b) Define ‘fire’ and how do you recognise the existence of fire. Relate your answer with the facts of the above case.
(c) What is ‘proximate cause’ and its relevance? Determine the proximate cause in the above case.
(d) In case of ambiguity in a contract of insurance, it should be resolved in favour of the insured. Discuss the relevant provisions and their applicability to the above case.
(e) Define ‘fire insurance’ and explain the risks covered and exclusions under a standard fire and special perils policy.
(f) Is it compulsory for a loss to be surveyed by a person? Who can conduct such a survey and what are the duties of such a surveyor?
Answer:
(a) In the given case, on perusing the facts it is very clearly seen that the insurance company was not justified in refusing to pay the claims, because the reasons for the loss was very much covered by the terms and conditions of the policy.

In another way, the claim made by Kishore was genuine and had to pay.
As seen from the case details, the loss was caused due to short circuit circulating which resulted in a flash over.
The cause of loss to the boiler and equipment was due to the fire. Short circuit circulating resulted in a flash over. Due to this flash over and over currents, excessive heat energy was generated which resulted in the evolution of marginal fire.

The surveyors observed in their reports that a flash over took place.
Fire of an extremely short duration followed short circuit.
Due to this flash over and over currents, excessive heat energy was generated which resulted in the evolution of marginal fire.

As fire was the proximate cause of the loss, the claim was genuine and stand taken by insurance company was not tenable.
Note: One of the basic principles of insurance is Principle of Causa Proxima. Principle of Causa Proxima, or in simple English words, the Principle of Proximate (i.e. Nearest) Cause, means when a loss is caused by more than one causes, the proximate or the nearest cause should be taken into consideration to decide the liability of the insurer.

(b)The meaning of ‘Fire’ is Ignition under accidental circumstances. Essentials of proof of a fire include firstly there should be an actual ignition of the property which ought not to have been on fire, under accidental circumstances.

Generally, Fire Insurance Policies are designed to provide protection against material loss or damage, by fire and other specified perils.
Fire or combustion is result of normally fuel, oxygen initial source of heat. In the above case, the loss was evidently caused by “Flashover, which can be defined as a phenomenon of a developing fire radiant energy at wall and ceiling surfaces within a compartment. In the above case, the paint had been burnt due to the said flashover. Such high energy levels, would undoubtedly, have resulted in a fire,
causing melting of the panel board.” Therefore, the loss was evidently caused by fire.

(c) Nearest Cause can be defined as a cause which is not the cause that is nearest in time or place but the active and effective cause that sets in motion a chain of events which brings about the ultimate result without the intervention of any other force working from an independent source.

Notwithstanding, the question always is: Is the unbroken connection between the wrongful act and the injury, a continuous operation? In another way, did the facts constitute a continuous succession of events, so linked together as to make a natural whole, or there was some new and independent cause intervening between the wrong and the injury.

In the given case, if the nearest cause of the loss or destruction, including other machines, apparatus, fixtures, fittings etc, or part of the electrical installation is due to fire which started in an electrical machine or apparatus, all such losses is covered by the policy. The question is to test whether a flashover and fire was the proximate cause of the damage.

To realise this it is necessary to understand the sequence of events, which is as follows:

• Short-circuit takes place in the main switchboard receiving electricity from the State Electricity Board possibly due to the entry of a Vermin.
• Short-circuit results in a flashover.
• Short-circuit and flashover produced over-currents, which in turn produced enormous heat.
• The over currents and the heat produced resulted in the expansion and ionization of the surrounding air. The electricity supply from the State Electricity Board got tripped.
• The paint of the Panel Board was charred by the enormous heat produced and the MS partition of the adjoining feeder connected to the generator power developed a hole.
• It resulted in formation of smoke/soot and the ionized air crossed over the MS partition and entered into the compartment receiving
  electricity from the generator. Consequently the generator power supply also got tripped.
• The tripling of purchased power and generator power resulted in stoppage of water/steam in the waste heat boiler.
• The flue gases at high temperature continued to enter the boiler, which resulted in thermal shock causing damage to the boiler tubes.

In this connection, it may be noted that in their written submission before the National Commission the company has admitted that there was a flashover and fire. Therefore, fire is the nearest cause of loss.

(d) “Adhesion” is a silent feature of insurance contract. In a contract of adhesion, one party draws up the contract in its entirety and presents it to the other party on a ‘take it or leave it’ basis; the receiving party does not have the option of negotiating, revising, or deleting any part or provision of the document.

Insurance contracts are of this type, because the insurer writes the contract and the insured either ‘adheres’ to it or is denied coverage.

In a Court of law, when legal determinations must be made because of ambiguity in a contract of adhesion, the Court will render its interpretation against the party that wrote the contract.
Typically, the Court will grant any reasonable expectation on the part of the insured (or his or her beneficiaries) arising from an insurer- prepared contract.

In the given statement, refers to the interpretation of the policy conditions and provisions. As a matter of fact, in a policy, the wordings are very technical and not easy to understand.
Hence, law and guidelines very specifically emphasize using simple, understandable and clear language so that there is no confusion in understanding of the conditions by either party to the contract.

In the above case, there was a dispute with regards to the cause of loss. While the insured claimed that cause of loss is a covered cause of loss and hence the claim was not tenable. The surveyors accepted in their report that the cause of loss was not a sustained fire, but a possible fire after the flash over being of a very short duration.

This means that they have also accepted the cause of loss to be fire but for a short duration. As the fire insurance policy conditions cover fire and as there was no mention of a sustained fire in the policy wording, the insurance company cannot change the statutory definition and therefore, as per law, and as per the doctrine of contra proferentum, the law provides that in any condition, in case there is any ambiguity in the policy, in a contract of insurance, the ambiguity should be resolved in favour of the claimant and against the insurance company. Hence in the present case, the repudiation of the company was not justified and hence, the claim is payable and the dismissal of the case was also justified.

(e) Section 2 of the Indian Insurance Act, 1938, “Fire Insurance Business” is defined 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 in fire insurance policies.

A Standard fire and Special perils policy covers the following 12 different types of risks covered such as:

• Fire
• Lighting
• Explosion/Implosion
• Aircraft damage
• Riot
• Strike
• Malicious and Terrorism Damage (MTD)
• Storm
• Cyclone
• Typhoon
• Tempest
• Hurricane
• Tornado
• Flood and Inundation ,
• Impact damage by rail/road/vehicle or animal
• Subsidence and landslide (including rockslide) Bursting and/or overflowing of water tanks
• Apparatus and pipes
• Missile testing operations
• Leakage from automatic sprinkler installations
• Bush fire etc.

The exclusions under a fire policy are given below:
1. Loss of or damage to any electrical machine, apparatus, fixture or fitting (including electric fans, electric household or domestic appliances, wireless sets, televisions sets and radios) or to any portion of the electrical installation, arising from or occasioned by over running, excessive pressure short circuit, arcing self-heating or leakage of electricity from whatever cause (lightning included), provided that this exemption shall apply to the particular electrical machine apparatus, fixtures, fittings or portion of the electrical installation so affected and not to other machines, apparatus, fixture, fittings or portion of the electrical installation which may be destroyed or damaged by fire so set up.’

2. A perusal of the exclusion clause shows that the main part of the exclusion clause which protects the insurer from liability under the policy, covers loss of damage to any electrical machinery, apparatus, fixture or fittings including wireless sets, television sets, radio and so on which themselves are a total loss or a damage or damaged due to short circulating, arcing, self-heating or leakage of electricity. However, the proviso to the said clause through inclusion of any other machinery, apparatus, fixture or fitting being destroyed or damaged by fire which has affected any other appliances such as television sets, radio, etc, or electrical machines or apparatus are clearly included within scope of the fire policy for whatever damage or destruction caused by the fire.

If for example the short circulating results in damage to a television set through fire created by the short circuiting in it, the claim for it is excluded under the fire policy. However, if from the same fire there is a damage, to the rest of the house or other appliances, the same is included within the scope of the fire policy by virtue of the proviso.

(f) No. It is not compulsory for an insurer to appoint a surveyor for each and every loss reported by a policy of general insurance.

• Only where the estimated loss exceeds ? 20,000, the insurers are mandated to appoint a licensed surveyor to assess and settle the loss. [Section 64UM (2) of the Insurance Act].
• Each person who is an individual and intending to act as a surveyor and loss assessor in respect of general insurance business shall apply to the Authority for grant of license in FORM-IRDA-I-AF as given in the Schedule to these regulations.
• The Authority shall, before granting license, take into consideration all matters relating to the duties, responsibilities and functions of surveyor and loss assessor and satisfy itself that the applicant is a fit and proper person to be granted a license.

In special and without prejudice to the foregoing, the Authority shall satisfy itself that the applicant, in addition to submitting the application complete in all respects:

• satisfies all the applicable requirements of Section 64UM read with Section 42D of the Act and rule 56A of the Insurance Rules,1939;
• possesses such additional technical qualifications as may be specified by the Authority from time to time;
• has furnished evidence of payment of fees for grant of license, depending upon the categorization;
  has undergone a period of practical training, not exceeding 12 months, as contained in Chapter VII of these regulation; and
• furnishes such additional information as may be required by the Authority from time to time.

The Authority on being satisfied that the applicant is eligible for grant of license, shall grant the same in FORM-IRDA-2-LF as given in the Schedule to these regulations and send an intimation to the applicant together with an identity card mentioning the special class or category of general insurance business namely, fire, marine cargo, marine hull, engineering, motor, miscellaneous and loss of profit for which the Authority has granted license and the license shall remain valid for a period of five years from the date of issue thereof, unless cancelled earlier.

Some of the Obligation/Duties/Responsibilities of a Surveyor are given below:

• declaring whether he has any interest in the subject-matter in question or whether it pertains to any of his relatives, business partners or through material shareholding;
• maintaining confidentiality and neutrality without jeopardizing the liability of the insurer and claim of the insured;
• conducting inspection and re-inspection of the property in question suffering a loss;
• examining, inquiring, investigating, verifying and checking upon the causes and the circumstances of the loss in question including extent of loss, nature of ownership and insurable interest;
• conducting spot and final surveys, as and when necessary and comment upon franchise, excess/under insurance and any other related matter;
• estimating, measuring and determining the quantum and description of the subject under loss;
• advising the insurer and the insured about loss minimization, loss control, security and safety measures, wherever appropriate, to avoid further losses;
• commenting on the admissibility of the loss as also observance of warranty conditions under the policy contract;
• surveying and assessing the loss on behalf of insurer or insured;
• assessing liability under the contract of insurance;
• pointing out discrepancy, if any, in the policy wordings;
• satisfying queries of the insured/insurer and of persons connected there to in respect of the claim/loss;
• recommending applicability of depreciation and the percentage and quantum of depreciation;
• giving reasons for repudiation of claim, in case the claim is not covered by policy terms and conditions;
• taking expert opinion, wherever required;
• commenting on salvage and its disposal wherever necessary.

Note: The appointed surveyor shall submit his report within 30 days of his appointment. In exceptional cases, the surveyor may seek extension of time up to 6 months from the insurer, under intimation to the insured. If the report is incomplete, the insurer may seek additional report within 15 days of submission of the report by the Surveyor. Such an additional, report must be submitted within 3 weeks of request having been made. The main role of the surveyor is to assess the loss and its quantum and not to settle the claim.

Question 12.
A is an individual and owns extensive properties. He has insured them against comprehensive risks with a general insurer. One property X was insured for a sum of ₹ 8,00,000 against fire and incidental risks. The property was lost to a fire accident and A made a claim against the insurance company. After getting a report from a surveyor, the insurer rejected the claim stating that there had been some breaches in warranties. A comes to you for advice as to how to proceed further. What course of action will you suggest to A to enable him to prove the claim against the insurer?
Answer:
There are different forums open for an insured to consider his claim. For an insured to proceed with his claim in an outside forum, he has to exhaust internal procedure. He must make an representation to the insured’s own grievance settlement mechanism that has been made obligatory for the insurer to establish and when the insured is not satisfied with the progress of the claim refer to forum or the forum must result, he has option to proceed further.

The option open to him are civil courts and the common protection agencies are easiest method that has been prescribed by the IRDAI to conform to the Redressal of Public Grievances Rules, 1998 and approach the Insurance ombudsman. The ombudsman can step in cases where there is a partial or total representation of a claim by the insurer. Hence, this procedure will be available to A.

The dimensions of the ombudsman scheme make it very plain to an insured to adopt as an easy facility. The complaint with the ombudsman must be filed within one year from the date of rejection by the insurer or a first seller from the insurance company on the insured’s representation.

There is a two-stage procedure followed by the ombudsman-viz an initial recommendation and then being not found acceptable or final award. Ombudsman’s recommendation comes within a month of the date of receipt of the complaint by him and is after hearing both insured and insurer of the recommendation made by the ombudsman were to be acceptable to the parties, they could go ahead and, settle the claim with the insurance company with the recommendation not later than 15 days of the receipt from the ombudsman.

If the matter does not get settled at most stage the ombudsman shall after hearing the parties will pass an award in writing within three months of the receipt of the complaint and a copy of the award is sent to both the insurer and the insured. The award binds the insurance company but if the insured does not feel satisfied with the ombudsman’s decision , he can further go for legal remedies in courts etc.

One limiting factor of the ombudsman process is that the award can not exceeds ₹ 20.00 lacs and the matter should be non-commercial.
It has been seen that the ombudsman path is the cheapest and quickest settlement path for the resolution of the dispute in re-dispute claim.
In the present case, the cover granted was non-commercial the subject-matter insured was a property. The insurance cover was for ₹ 8.00 lacs.
In the circumstances, the advice for A will be file a complaint to the Insurance ombudsman after exhausting the approach to the internal dispute resolution of the insurance company.

Question 12.
United Industries insured its factory assets as detailed below with Star General Insurance Company for the values given below under a Standard Fire Insurance and Special Perils Policy.
The insurance was on market value (indemnity) basis.
Building ₹ 6,75,00,000
Machinery (Other than Boiler) ₹ 18,76,00,000
Boiler: ₹ 1,75,00,000

The boiler being subject to a loan agreement with National Bank was also insured by the bank under a separate Standard Fire and Special Perils Policy from Satellite Insurance Company for ₹ 2,75,00,000 which was the current replacement value of the boiler. This policy was also obtained on the market value basis only.

The policy deductible in respect of any one claim was ₹ 25,000/- under each of the two policies.
In a major fire accident the insured factory was heavily affected. All the three assets namely Building, Machinery and Boiler were heavily damaged.

The surveyor appointed by the Star General Insurance Company whose appointment was also concurred by the Satellite Insurance Company assessed the loss on indemnity basis as below after taking into account the applicable depreciation.
Building Repairs: ₹ 1,25,00,000
Machinery Repairs and replacements: ₹ 2,50,00,000
Boiler Repairs: ₹ 75,00,000

As assessed by the surveyor the market value as on the. date of loss of respective assets were as below:
Building: ₹ 9,00,00,000
Machinery other than boiler: ₹ 26,80,00,000
Boiler:₹ 2,75,00,000
Work out the recovery obtainable from each of the two insurers under their respective policies based on the assessment done by the surveyors as above.
Answer:
Claims recoverable under the Star General Insurance Company’s Policy
(i) Building:
If the declared sum insured is found to be less than the value of the property insured, then the claim amount is proportionately reduced. In building this condition is applied so the losses assessed by the surveyors are reduced.
Market value of the building as on the date of loss: ₹ 9,00,00,000/
Sum insured under the policy : ₹ 6,75,00,000/
Under Insurance : 9,00,00,000/(-) 6,75,00,000/ = 2,25,00,000/
2,25,00,000/ 9,0,00,000 x 100
= 25%
Building Repairs assessed by the surveyors = 1,25,00,000/
Net Claim before application of excess = 1,25,00,000 x 75%
= ₹ 93,75,000/

(ii) Machinery : Same above Condition is Applicable in Machinery also
Market value of machineries as on the date of loss: ₹ 26,80,00,000/
sum insured under the policy :₹ 18,76,00,000/
Under Insurance : ₹ 26,80,00,000 –
18,76,00,000
= 8,04,00,000
= 8,04,00,000
26,80,0,000 / 100
= 30%
Machinery repairs assessed by the surveyor = ₹ 2,50,00,000/
Net admissible daim befooe apphcation of excess = 2,50,0, 000 x 70% = ₹ 1,75,00,000/

(iii) Boiler:
Market value of the Boiler as on the date of loss : ₹ 2,75,00,000/
There is no under insurance in the case of boiler as the total sum insured under both the policies put together is more than the market value
Boiler repairs as assessed by the surveyors = ₹ 75,00,000/-
Net admissible claim for Boiler from Star General Insurance Company = 1,75,00,000/
45,00,000 × 75,00,000
= ₹ 29,16,667/-
Total claim recoverable from Star General = 93,75,000
+ 1,75,00,000
Insurance Company before applying excess + 29,16,1667/ = ₹ 2,97,91,667/-
Net claim form Star General Insurance Company = 2,97,91,667 – 25,000
after excess = ₹ 2,97,66,667/-
Claim recoverable under satellite Insurance Company’s Policy
Admissible claim before excess = 2,75,00,000/ 4,50,00,000 x 75,00,000 = ₹ 45,83,333
Excess = ₹ 25,000
Net Claim after excess = 45,83,333 – 25,000 = ₹ 45,58,333

Question 13.
ABC Co. Ltd. which operates a wholesale warehouse, had a fire on its premises on 30th April, 2016 which destroyed most of the building and stock worth of ₹ 10,160 was salvaged. The company has a Fire Insurance Policy (with suitable average clauses) covering the assets as under:
Assets Insured Insurance Cover (in ₹)
Stock 6,50,000
Building 9,00,000
Loss of Profits
Including standing charges of ₹ 2,50,000 with a six month period of indemnity. –
The Company’s last Profit & Loss Account (year ended 31st March, 2016) is given below:
Profit & Loss Account for the year ended 31st March, 2016

The company’s records show that the sales for April, 2016 had been at ₹ 1,50,000. Payments made to trade creditors in April, 2016 were ₹ 1,15,500 and the creditors increased by ₹ 4,500.

The company’s business was disrupted until the end of July, 2016 during which period the turnover fell by 12,20,000 compared with the same period in the previous year. It was agreed that 65% of the value of the building had been lost and at the time of fire it was worth ₹ 10,00,000.
Questions:
(i) Discuss the validity of ABC Company’s claim under a ‘Fire Insurance’ policy stating the loss coverage as per the policy provision. Can “Loss of Profit” also be insured?
(ii) What is the legal implication and provision relating to “Average clauses”? How will it affect ABC company claims? Calculate the liability of the Insurance Company for loss of stock, building and profits claims compensation payable to ABC Company.
(iii) Explain the process of claim settlement followed by General Insurance Companies and the documents required to be submitted by ABC Ltd. for its claims.
Answer:
(i) The company ABC Ltd. is entitled to a claim payment under its “fire Insurance” policy for the loss of stock, building and profits as the assets were destroyed due to a fire in its warehouse.
A fire insurance policy cover all losses caused due to unforseen or damage to property due to fire and other parts covered under the policy includes:

• Dwelling
• Office
• Machinery, equipments accessories
• Goods, Stock material, semi finished goods etc.

The fire insurance policy cover all losses caused due to :

• Goods spoiled or property damaged by water used to extinguish the fire.
• Pulling down of adjacent premises by the fire brigade in order to prevent the progress of flame.
• Breakage of goods in the process of their removal from the building where fire is raging e.g. damage caused by throwing furniture out of window.
• Wages paid to persons employed for extinguishing fire.

Loss of profit can also be covered on payment of extra premium as add-on paid along with a basic fire policy. It cannot be sold as stand alone basis separately as an independent policy.
The sum insured under Loss of Profits policy should represent the gross profit of the indemnity period selected.

The indemnity period is the maximum period required to put the business back into normal operation after damage to insured property by an insured peril. The indemnity period could vary from 6 months to 3 years.

For indemnity periods up to one year, the annual gross profit should be selected as sum insured.
For indemnity periods longer than one year, the Gross Profit (GP) should be proportionately increased. For example:

Indemnity Period	Calculation of Sum Insured
1 year (12 months)	Annual Gross Profit x 1
2 years (24 months)	Annual Gross Profit x 2
2.5 years (30 months)	Annual Gross Profit x 2.5
3 years (36 months)	Annual Gross Profit x 3

For the purpose of Loss of Profit insurance, Gross Profit (GP) is ;
commonly understood to be the net Trading Profit plus Standing Charges (fixed charges). Usually, insurance companies will cover only those Standing Charges which have been specifically declared at the time of proposal.

(ii) The application of average clause is trigged at the time of a claim settlement if the Insurance Company observe that a property is underinsured. In other words, where the full value of a property is not insured it implies that, the full indemnity of the loss is not available, due to inadequacy of sum insured.

In the given case, ABC Co. Ltd. did not insured building at its full value. It has underinsured. While the building was valued at Z10 lacs on the date of loss the sum insured available was only Z9 lacs. Hence ABC Co. Ltd will compensate on this basis only.

The various loss claim under the policy are shown below:
Gross Profit % for last year
Gross Profit as per Profit & Loss (Net Profit+ Other Expenses+ Insured Standing Charges)

Gross Profit % for last year
Gross Profit % for last year = \(\frac{4,05,000 \times 100}{22,50,000}\) = 18%
Calculation of Purchases

Memorandum Trading Account for the period ended dated of tire

Computation of Loss of Stock
Estimated Closing Stock as at the date of fire ₹ 6,42,000
Less Stock Salvaged ₹ 10,160
Loss of Stock ₹ 6,31,840
Loss of building
Value of Building ₹ 10,00,000
65% of the value of building ₹ 6,50,000

Since the insurance cover was less than the value of the asset average clause will apply
Claim of loss of Building = \(\frac{9,00,000 \times 6,50,000}{10,00,000}\) = ₹ 5,85, 000
Claim for Building loss = ₹ 5,85,000

Loss of Profit
Indemnity Period = 3 Months
Gross Profit Ratio for the year
Net Profit + Insured Standing Charges = \(\frac{2,35,000 \times 1,15,500}{22,50,000}\) = 15.57 %
Short Turnover = ₹ 2,20,000
Loss of Profit 2,20,000*15.57% = ₹ 34,254

(iii) General Insurance is basically an insurance policy that protects against losses and damages other than those covered by life insurance. The coverage for most general insurance policies is for one year. The risks covered by general insurance are:

• Property loss, for example stolen car or burnt house.
• Liability arising from damage caused by yourself or a third party.
• Accidental death or injury. General Procedure for Claim Settlement: The general procedure for seeking claim settlement is same in most forms of General Insurance.

The procedure in detail is as explained below:

• Intimation of submission of the claim by the insured: The insured would intimate the insurance company of the occurrence of a peril or risk which has caused loss or damage to the insured property.
• Evaluation/Registration of Claims:

The insurer would briefly initiate process check.

• Whether the policy has been issued by the insurer.
• Whether the policy is in existence.
• Whether the correct premium has been received by the insurer.
• Whether the peril causing loss/damage is an insured peril.

If the insurer is not satisfied and the necessary elements of insurance are not present, it may repudiate the insurance claim and intimate the insured about the repudiation. In some cases, the insurer may ask for some other inputs about the insurance claim which he thinks necessary for processing the claim further.

If on receipt of the additional inputs, the insurer is not satisfied, he may repudiate the claim and intimate the insured about repudiating of the claim. Only after getting satisfied about the claim, the insurer initiates the next step for claim processing.

The insurer would immediately arrange for surveyor to be appointed who would look into the circumstances of the loss, assess the actual loss suffered in money terms and that which can be indemnified in terms of the contract, advise the insurer regarding compliance of the various terms conditions and warranties under the contract etc.

The loss assessor has also to advise the client on various aspects of loss mitigation, limitation and salvage. Loss investigation including forensic investigation and analysis may also come under the purview of a professional investigator. Acid tests applied by the surveyor of the various principles – insurable interest, utmost good faith, proximate cause and of course contribution, help in deciding ultimately, whether a claim is payable and the amount to be paid.

If the claim is not paid within the same financial year in which it occurred then the surveyor’s assessment would enable the adequate provisioning for the claim in its financials.

(c) Settlement of Claims: The insurer would ensure claims are settled on receipt of the final report from the surveyor, generally within the Turnaround time (TAT) by various regulations and committed by the insurance company.

(d) Recovery: The next step for the insurance company, in certain cases, is initiating process for recovery from the third person who is party in the loss e.g. in marine cargo transit claims- recovery proceedings as per applicable statutes are initiated against carriers.

In motor third party liability claims -awards are settled with victims of any motor accident and action initiated against the vehicles for recovery.

The various documents necessary for subtracting the claim under Fire Insurance policy by ABC Co. Ltd. include:

• Copy of the original fire insurance policy.
• FIR Copy.
• Photographs of the loss/ fire accidents.
• Accounts reports, ledgers to show the loss of profit.
• Past year final accounts statement.
• Surveyors initial report.
• Claim notice copy.

Question 14.
ABC Ltd. is a Public Limited Company, engaged in the business of exports of rice. It uses godowns of the Port Authorities for storage of the rice stocks meant for exports. The company has taken a Fire Insurance Policy cover from XYZ Insurance Ltd. which is a Public Sector Company. Satish who is a Development Officer with the Insurance Company has been assigned the account of ABC Ltd. to service and cater to all its requirements of service. The policy is effective from July of one year to June of the subsequent year.

On 21st and 22nd July 2015, there were heavy rains with cyclonic storms, due to which the Port Authority’s Godowns were severely flooded. On ceasing of the rains on 26th July 2015, ABC Co. Ltd. found that most of the bags stored in the Ports Godowns had been washed away. Except for some clusters of rice here and there, all the stocks had been damaged and destroyed by the rain. The Company lodged a claim with the Insurance Company, asking for compensation under the Fire Insurance Policy.

The Insurance Company while examining the claim, observed that:

• The policy was due for renewal on 1 st July 2015 and the Insurance Co. had already sent a notice for payment of renewal premium to ABC Limited.
• ABC Ltd. had handed over a cheque for the premium as per the premium notice received from XYZ Insurance Ltd.
• The cheque was given to Satish, Development Officer on 27th June, 2015. The receipt of the cheque was duly acknowledged by Satish who had also issued a Cover Note for the period from 1st July, 2015 to 30th June, 2016.
• Satish however went on an official trip and deposited the cheque with his company branch on 16th July 2015 after returning from his official trip.
• The accounts department deposited the cheque with the bank of the Insurance Company on 21st July 2015 which was credited to the XYZ Ltd. account on 25th July 2015.
• The Insurance Company however did not issue the regular policy till the event of the loss.
• ABC Ltd. was insured with XYZ Insurance Ltd. since the inception of its business 12 years back and no claims had been made so far by the Company.

On receipt of claim from ABC Ltd. the Insurance Company analysed the claim papers and sent a reply to ABC Ltd. repudiating the claim on the following grounds that:

• ABC Ltd. Co. was not covered on the date of loss, as no premium was paid for the cover.
• The premium was received by XYZ Insurance Co.’s accounts department on 25th July 2015 after the loss had occurred and hence no insurance policy can be granted.
• Loss due to floods is not covered under Fire Insurance Policy.
• XYZ Insurance Co. was not bound by the Cover Note issued by Satish, Development Officer.

ABC Ltd. Co., on receipt of reply from XYZ Insurance Ltd. has approached you as an Insurance Expert to advice them for resolution of the dispute. They have also appraised you with the following additional facts about the case :

• Goods stored in the Godowns included 22000 tons of Rice acquired at a cost of ₹ 200 crores. The quantum of stocks was supported by the stock registers of the Port Authorities, which is also a Third Party record for confirmation.
• The stocks in the godown were covered by a Fire Insurance Policy of X 250 crores.
• The stocks were pledged to a Nationalized bank for a loan of ₹ 75 crores. The outstanding amount on the date of fire was ₹ 60 crores The Bank has also sent a claim to the Insurance Co. to pay the claim amount directly to the bank as the name of the bank was also endorsed on the earlier policies.
• The District Collector of the area appointed by the State Government, as Relief Commissioner had also certified that the goods in the godown were lost in the floods and there was no salvage.
  Based on the above facts of the case, as an Insurance Expert, kindly advice

ABC Ltd. Co. on the following issues :
(a) Validity of the Fire Insurance Policy on the day of the accident?
(b) Tenability of the claim of Banker and ABC Ltd. for flood loss under Fire Policy.
(c) Claims settlement process as laid down by the Insurance Act, 1938.
(d) Liability of XYZ Co. Ltd. under the provisions of the Fire Insurance Policy.
(e) Role of IRDAI and Insurance Ombudsman in dispute resolution and settlement in the light of the given case.
Answer:
(a) The Fire insurance policy was very much valid and in force on the date of the accident. It is to be borne in mind that ABC Ltd. has been taking the policy, with XYZ Insurance Ltd. since inception of the business, almost 12 years back, which is quite long. The company had a fire cover without break for so many years. The company obviously was a reputed exporter and has extensively used the port facility for storage and dispatch etc.

These facilities are run by independent statutory bodies and thus can be trusted with the facts. The period for cover was to start on 1st July 2015. A premium notice based on the existing policy coverage, terms and conditions was issued by the insurance company before the expiry of the existing policy and ABC Ltd. had issued the renewal premium cheque and handed over the same to the Development Officer, an employee of the insurer and noting at its records.

Development Officer (DO) is the employee of the Insurance company and hence an authorised representative. He had received the cheque on 27th June 2015 before the expiry of the current policy and also had acknowledged it by issuing Cover Note pending issue of the policy document. The PO is an official to issue Cover Note and in fact it is part of his assigned duties to issue one.

Moreover, it is in clear position in law that a Cover-Note is a valid document that brings into existence the relationship of insurer and insured between the parties and has validity for 60 days by when the normal formalities of issue of a policy could be completed. Secondly, the cover is not a new one but is only a renewal of the existing policy on the same terms as agreed to between the parties earlier. Thus, it is clear that there exists a contract between the Parties, a valid Insurance Contract between the two parties on the subject matter of cover.

Thirdly, the provisions of section 64VB of the Insurance Act, 1938 clearly stipulate the payment of premium in advance before commencement of the cover. Facts indicate that the amount of premium was collected by the DO of the Insurance Company on 27th June 2015 which is prior to the commencement of the next year’s risk cover.

The insurer lodged the cheque for collection on receiving it from the DO Satish and the banker credited the insured account only on 25th July 2015 due to intervening Government and bank holidays. However, it shall be noted here that once the premium is received by the Insurance Company, the risk is deemed to have been commenced and it is immaterial when they deposited the premium cheque in their accounts.

One other point to be noticed is that the cheque was honoured on presentation and that there was no indication that the customer had no balance in his account, the cheque was liable to be dishonoured on presentation etc. Issue of a cheque and its collection were a part Of normal commercial activities. Thus it has to be concluded that the payment of the premium has been made by ABC Ltd. in the normal course and section 64VB’s requirement has been complied with in all aspects. Thus all the pre-requisites evidencing the existence of a fire policy is satisfied and therefore, as on the date of the accident a valid insurance cover existed in favour of insured ABC Ltd.

(b) The claim of the insured ABC Ltd for loss of rice bags due to floods under a fire policy is valid and tenable. It is seen that the cover that existed was a Standard Fire insurance Policy. This policy generally covers losses arising out of fire and special allied perils such as storms, floods, typhoons, earthquakes, inundation, lightning, strikes, and landslides. In the case of Standard Fire Policy with Special Perils covered, the risks of Storm, Cyclone, Flood, inundation and Earthquake risks are covered on payment of applicable additional premium.

In the present case, the cause for loss is damage due to storms, flooding and consequent inundation, it is noticed that such a risk is covered under the standard fire policy, subject to other conditions being satisfied, the insurer is liable for the losses. A standard fire policy usually does not cover losses on account of damages caused by war and warlike operations, nuclear perils, pollution or contamination, electrical or mechanical breakdowns, burglary and housebreaking.

Secondly, in the given case the claim of the Banker who had advanced loan to ABC Limited against the stocks which were lying in the godowns of the port authorities is also valid and tenable. The total loan advance by the bank was ₹ 75 crores and the amount outstanding on the date of loss was ₹ 60 cores. This makes the bank as a Party with an insurable interest which will permit it to raise with the insured the question of the settlement of the claims. It will be within the rights of the bank to have the claim amount, to the extent of amount of the loan outstanding, to be released to it.

(c) The general procedure for seeking claim settlement is same in most forms of General Insurance.
Step 1 – Intimation/Submission of the Claim by the Insured The insured would intimate the insurance company of the occurrence of a peril or risk which has caused loss of or damage to the insured property.

Step 2 – Evaluation/Registration of Claim
The insurer would briefly initiate process check –

• Whether the policy has been issued by the insurer
• Whether the policy is in existence
• Whether correct premium has been received by the insurer
• Whether the peril causing loss/damage is an insured peril

If the insurer is not satisfied and the necessary elements of insurance
are not present, it may repudiate the insurance claim and intimate the insurer about the repudiation. In some cases, the insurer may ask for some other inputs about the insurance claim which he thinks necessary for processing the claim further. If on receipt of the additional input, the insurer is not satisfied, he may repudiate the claim and intimate the , insured about the repudiation of claim. Only after getting satisfied about the claim, the insurer initiates the next step for claim processing.

Step 3 – Appointment of surveyor/loss assessor/investigator etc.
The insurer would immediately arrange for surveyor to be appointed who would look into the circumstances of the loss, assess the actual loss suffered in monetary terms and that which can be indemnified in terms of the contract, advise the insurer regarding compliance of the various terms conditions and warranties under the contract etc.

The loss assessor has also to advise the client on various aspects of loss mitigation, limitation and salvage. Loss investigation including forensic investigation and analysis may also come under the purview of a professional investigator.

Acid tests applied by the surveyor of the various principles insurable interest, utmost good faith, proximate cause and of course contribution, help in deciding ultimately, if a claim is payable as well as quantum payable.
Submission of the claim form: The insured must fill all possible details in the claim form. He must lodge the claim form within 15 days of the fire to claim compensation. Delay in submission of claim from may result in non-acceptance of the claim.

Evidence of Claim: Along with the claim form, the insured must send certain proof of fire and other records, if available and if required. The evidence should enable the insurance company to determine the amount of loss.

Verification of Form: The claim form along with the supporting evidence is verified by the insurance company. The insurance company then appoints the surveyors to conduct an assessment of the actual loss.

Survey: After the receipt of the form, and necessary verification, the insurance company appoints the surveyors to assess the actual loss. The surveyors conduct the necessary investigations. They investigate into the cause of fire, the actual amount of property lost and other relevant details. The surveyors then make the report of their findings and assessment of the loss.

Appointment of the Arbitrator: There may be a dispute regarding the amount of claim. In such a case, an arbitrator is appointed, acceptable to both the parties, to settle the amount of the loss.
Settlement of Claims: If there is no dispute between the two parties, as to the amount of loss, the insurance company then makes necessary payment to the insured.

(d) Yes, insurers are liable for the loss as per the terms and conditions of the Policy because two important conditions have been fulfilled. Firstly, there exists the policy coverage. Secondly, the policy is valid as on the date of loss. Thirdly, the loss occurred due to a peril covered under the policy issued. With the client /policyholder complying with all the required formalities, the insurer is liable for the loss.

The client has also informed the insurer of the accident immediately after it knew of its occurrence. Therefore it has to be concluded that there existed a policy, on the date of the event in terms of which a claim has to be settled. It has to be assessed and the amount of compensation has to be determined.

To assess the damage, the insurer has to appoint a surveyor who has to finalise his assessment to the insurer based on the documents submitted and facts of the case and this assessment will form the basis for settlement. In the present case, the loss has been established independently in that stocks those were in the garden 22,000 tons of rice had been verified by the stock record maintained by the Port Trust which is an independent statutory authority. Its certificate can be accepted prima facia.

In addition, physical examination of the godown established the fact that the entire stock at godown had been either damaged or washed away due to the force of the storm coupled with heavy rain and there was no salvage at the godown. The district collector who was the Relief commissioner had confirmed about the total loss of the stock. It is thus crystal clear that the entire stock had been lost.

Hence, this is a claim for total loss and accordingly, the total cost of the stock is payable. The cost of acquisition of total stocks as reported by ABC Limited was ₹ 200 crores which is payable subject to report from the surveyor and final assessment by the authorities of the insurance company. This also includes the amount payable to the bank.

(e) IRDAI is the Regulatory Authority for insurance business in India. The Act that established it has defined its powers under section 14 and apart from other duties outlined in the section, the following is clearly indicated “to protect the interests of the policyholder with regard to settlement of claims and other terms and conditions”. This specific object of the IRDAI has to be invoked by ABC Limited to support its claims for IRDAI’s intervention in regard to this matter if the insurer does not act fairly and reasonably in the matter.

The fact outlined in the question clearly established on liability of insurance company towards ABC Limited – claims whether there existed a policy. Whether the perils covered flood losses etc. – and it will, therefore, be very appropriate for ABC Limited to approach IRDAI seeking its intervention. Whilst IRDAI may intervene in this case and issue a direction to the insurance company.

Past records establish the fact in an identical case, where a client has approached IRDAI for its intervention when its long period of negotiation with a public sector insurance company did not result in any solution. After examining all the factors IRDAI decided to intervene and passed an order directing the insurer to pay the claim.

The insurer not satisfied with the IRDAI’s direction took the matter in appeal to the court which clearly indicated that IRDAI had all the necessary the powers and in fact an obligation to intervene on behalf of the insured. That step will not only be necessary to protect the interest of a policyholder but represented wholly and truly authority, obligation to control, nurture and develop the insurance industry.

An insured can approach an Ombudsman with his case for settlement when the insurance company refuses to accept the claim or intends to settle it at a lower value than expected by the insured.

The only drawback to this facility is that commercial claims of more than ₹ 20 lakh cannot be referred to Ombudsman. In this case, ABC Limited cannot go to the Ombudsman to settle the claim since loss amount is above the limit. Alternative available is to move the Consumer Courts where no such limit of loss is fixed.

An Ombudsman shall be selected from amongst persons having experience of the insurance industry civil servant from administrative service or judicial service. An insurance Ombudsmen is appointed for a term of 3 years. However, no person can continue as Insurance Ombudsman after he/she has attained 65 years of age (Proceedings before the Ombudsmen).

The Ombudsman may, if he deems fit, allow the complainant to adopt a procedure other than under sub-rule (1) or sub-rule (2) of rule I4 of Insurance Ombudsman Rules, 2017 for making a complaint, after notifying the parties to the dispute.

Recommendations made by the Insurance Ombudsman:
Where a complaint is settled through mediation, the Ombudsman shall make a recommendation which it thinks fair in the circumstances of the case, within one month of the date of receipt of written consent on mutual basis for such mediation and the copies of the recommendation shall be sent to the complainant and the insurer concerned. If the recommendation of the Ombudsman is acceptable to the complainant, he shall send a communication in writing within fifteen days of receipt of the recommendation, stating clearly that he accepts the settlement as full and final.

The Ombudsman shall send to the insurer, a copy of its recommendation, along with the acceptance letter received from the complainant and the insurer shall, thereupon, comply with the terms of the recommendation immediately but not later than fifteen days of the receipt of such recommendation, and inform the Ombudsman accordingly.

Awards by Ombudsmen:
Where the complaint is not settled by way of mediation under rule 16 of Insurance Ombudsman Rules, 2017, the Ombudsman shall pass an Award, based on the pleadings and evidence brought on record. The Award shall be in writing and shall state the reasons upon which the award is based.

Where the Award is in favour of the complainant, it shall state the amount of compensation granted to the complainant after deducting the amount already paid, if any, from the award. However, the Ombudsman shall not award any compensation in excess of the loss suffered by the complainant as a direct consequence of the cause of action or shall not award compensation exceeding ₹ 30 lakhs (including relevant expenses, if any).

The Ombudsman shall finalize its findings and pass an award within a period of 3 months of the receipt of all requirements from the complainant. A copy of the award shall be sent to the complainant and the insurer named in the complaint. The insurer shall comply with the award within 30 days of the receipt of the award and intimate compliance of the same to the Ombudsman.

The complainant shall be entitled to such interest at a rate per annum as specified in the regulations, framed under the Insurance Regulatory and Development Authority of India Act, 1999, from the date the claim ought to have been settled under the regulations, till the date of payment of the amount awarded by the Ombudsman. The award of Insurance Ombudsman shall be binding on the insurers.

Question 15.
Textiles Pvt. Ltd. Co. availed a Standard Fire and Special Perils Insurance Policy as per the standard format for factory building and machinery and also for stocks as given below. Insurance coverage for the building and machinery was on reinstatement value basis:

Assets	₹
Building	2,80,00,000
Machinery	7,20,00,000
Stocks	5,62,50,000

An accidental fire occurred on a Sunday night when the factory was not in operation. The factory, building, some machinery and stocks stored in the process block were damaged. As per the Appointed Surveyor’s Risk Inspection Report, the reinstatement value of the entire building and machinery, value of stocks immediately prior to accident was as below:

Assets	₹
Building	4,00,00,000
Machinery	9,00,00,000
Stocks	5,62,50,000

The Surveyor’s assessment of loss of different assets before application of underinsurance was as given below:
Assets ₹
Building (on the basis of actual repairs and replacement) 1.23,75,000
Machinery
Totally destroyed machinery

• On reinstatement value basis 2.81.25.000
• On depreciated value basis 1,57.50,000

Repairs to partially damaged machinery on actual 50,62,500
Stocks 27,00,000
Salvage Value NIL

• While the damaged building was completely repaired the insured did not reinstate the totally destroyed machinery for some business reasons. Based on the given facts, answer the following questions:
  (a) Define.Fire and discuss the scope of coverage and exclusions under a Standard Fire and Special Perils Policy.

(b) Interpret and explain the following clauses as applicable in a FIP:

• Reinstatement clause
• Average clause
• Coinsurance clause
• Over insurance clause
• Salvage clause

(c) Calculate the amount of underinsurance in case of building and machinery and work out the total claims amount payable by the Insurance Company under the FIP.

Question 16.
What is fire insurance? What are the exigencies, which fire insurance generally, covers?
Answer:
Fire Insurance:
The most popular property insurance is the standard fire insurance policy. The fire insurance policy offers protection against any unforeseen loss or damage to/destruction of property due to fire or other perils covered under the policy.

The different types of property that could be covered under a tire insurance policy are dwellings, offices, shops, hospitals, places of worship and their contents industrial/manufacturing risks and contents such as machinery, plants, equipment and accessories; goods Including raw material, material in process, semi-finished goods, finished goods, packing materials etc in factories, godowns and in the open; utilities located outside industrial manufacturing risks; storage risks outside the compound of industrial risks; tank farms/gas holders located outside the compound of industrial risks etc.

What a Fire Policy Covers:
Though it is called ‘Fire Insurance’, apart from the risk of fire, it also otters cover against lightning, explosion/implosion, aircraft damage, riot, strike and malicious damage, storm, cyclone, typhoon, hurricane, flood and inundation, impact damage, subsidence and landslide including rockslide, bursting and/or overflowing of water tanks, apparatus and pipes, missile testing operations, accidental leakage from automatic sprinkler installations, bush fire etc.

What a Fire Policy Excludes:
A tire insurance policy usually does not cover a certain amount known as ‘excess under the policy. Loss or damage caused by war and warlike operations, nuclear perils, pollution or Contamination, electrical/mechanical breakdown, burglary and housebreaking are excluded. Certain perils like earthquakes, spontaneous combustion etc can be covered on payment of additional premium. Fire insurance policies are issued for one year except for dwellings, where a policy may be issued for long term (with a minimum period of three years).

CS Professional Insurance Law and Practice Notes