Fire and Allied Perils Insurance is essential protection that small businesses as well as big corporations should have. Even if your business has the most advanced security measures, unexpected calamities can still cause tangible losses. And you need to have a contingency plan in place.
Fire Insurance is an annual policy that offers financial protection against a host of perils like fire, lightning, natural disasters, riots, malicious damage, terrorism, and much more. You can purchase a Fire Insurance policy to cover your commercial building, structures, stocks, furniture and fixtures, etc.
But before you set about purchasing a Fire Insurance policy, it is important to understand the types of Fire Insurance plans available in the market. These plans differ on the basis of the coverage provided, the premium required, etc.
Replacement & Reinstatement policy - The policyholder can, before issuance of the policy, opt to either cover his fixed assets like building, plant and machinery on a replacement value basis or a reinstatement value basis. Here, only fixed assets are considered while stock, merchandise and materials are covered based on their market value.
A replacement value policy covers the cost of replacing insured property that has been damaged by an insured peril.
Here, the insurance company pays the replacement value of the damaged asset. This value is calculated based on the market value of said asset after accounting for its depreciation and age.
Under a reinstatement policy, the insurance company is liable to reinstate / restore the damaged property to its condition prior to the covered loss.
The difference here lies in the way compensation is delivered to the insured. You see, on a replacement value basis, the cost of replacement is paid in the form of a claim. However, when a reinstatement clause is specifically opted for, payment is paid when the expenditure is incurred, i.e., during the reconstruction of the damaged property.
Comprehensive policy - This policy has the broadest scope of coverage. It provides protection against risks of fire and related perils like burglary, explosion, riot, theft, lightning, labour disturbances, etc. This policy comes highly recommended on account of the broad coverage it prpvides under a single plan. Even though the premiums for this policy rank on the higher end, its wide-ranging inclusions make it one of best choices for all businesses.
However, keep in mind that a comprehensive policy, as with all insurance policies, comes with its own exclusions and conditions that need to be adhered to.
Fire Insurance products like the Standard Fire and Allied Perils policy (SFSP), the Bharat Sookshma Udyam Suraksha Policy (BSUSP) and the Bharat Laghu Udyam Suraksha policy (BLUSP) fall under this category.
Fire Consequential Loss policy - This add-on policy is also known as a Fire Loss of Profit policy. It indemnifies the insured for the loss of profits caused by interruption of business operations in the event of a fire or other insured peril. Fire damage to a business can halt multiple operations including workers’ activities and projects in execution, while you continue to incur fixed expenses like rent, taxes, interest payments, etc. Under this policy, the insurance company provides compensation for loss of profit due to a decrease in sales, layoffs, auditor’s fees, and the like.
This kind of risk arising out of suspended business operations is not covered under a Fire Insurance policy. Hence, consequential loss policies are usually taken along with them and are only triggered when an event insured under a Fire Insurance policy occurs.
Valued and Valuable policies - A valued fire policy is suitable for assets whose value of damage at the time of loss can not be easily determined. These assets include works of art such as paintings, pictures, sculptures, crafts, jewellery, antiquities, and even articles of everyday use.
Under a valued policy, the value of the insured asset is decided and fixed at the inception, i.e., the time of purchase of the policy. The insurer is liable to pay the total pre-agreed amount irrespective of the asset’s market value at the time of loss or damage.
Since the market value of the property is not taken into account, this policy is generally considered to sway away from the principle of indemnity. Before accepting a Valued policy, the insurance company usually asks the insured to submit a Certified Valuation Report of the assets being insured. On the basis of this report, the sum insured is decided and the policy is issued. The amount paid to the insured at the time of loss is fixed and may be greater or lesser than the current market value.
A valuable policy, on the other hand, works on strictly opposing principles. Here, the claim amount is determined after the actual event of loss or damage to the insured property and not at the time of commencement of risk. The insurer determines the amount of loss taking into account the market value of the property. This is the kind of policy that is applicable for all other kinds of assets, like building, machinery, plant, etc. where the market value can be easily established.
Floating policy - This type of Fire Insurance policy is ideal for goods that are located at different places at one point of time. Through this policy, the policyholder can pay a single premium for a single policy that covers all insured assets at various locations on a floater basis. However, all the goods insured under this policy must belong to one person.
When stock is scattered at different locations, facing varying types and degrees of risk, it becomes difficult to determine a steady rate of premium. Hence, floater policies are usually preferred. They are ideal for large scale businesses that have merchandise located in more than one warehouses, ports, stations, etc. and for businessmen who deal with import and export of their goods.
Every location and value of the insured assets have to be disclosed, and the premium is charged based on an average rate by taking into account the total premiums that would have been paid had the assets been insured under a specific Fire Insurance policy.
Declaration Policy - This is another policy that is suitable for covering assets that fluctuate in value from time to time. A Declaration Policy is nothing but a kind of Floater Policy with an additional feature of regular stock value declarations to be made by the client.
First, a provisional sum insured is set for the policy based on the maximum amount of stock at risk during the period of the policy as decided by the insured. The insured then pays a premium corresponding to this provisional amount.
On a fixed date every month (or twice a month), the insured declares the highest value achieved by the fluctuating asset, and based on the average of these declarations, the actual sum insured is determined. If the actual sum insured is lower than the provisional premium, the insured can get a premium refund from the insurer, and vice versa.
Here, premium is more fair and reflective of the actual risk amount, since it can be adjusted throughout the period of the policy.
However, keep in mind that this kind of policy is not applicable in the following cases:
- When the duration of the policy is very short
- When the stocks are located at railway sidings
- When the stocks are still in process
There are certain factors that you should always consider before purchasing a fire insurance policy for your business. While your agent will be able to help you with understanding exactly what your needs are, having a comprehensive knowledge of what you should keep in mind can only stand to benefit your purchase decision.
Coverage offered : Taking into consideration the type and degree of risk your business faces should be the prime parameter you should base your decision on. If the asset you want to cover is located at multiple locations and its value fluctuates significantly over time, a floater or a floater declaration policy would be a good fit. On the other hand, if you’re not fully confident of the value of your assets a declaration policy will allow you to adjust your premium accordingly.
Add-on covers offered : There are different types of add-on covers which can be availed by paying an additional premium. If you’re looking for a particular type of risk protection that does not form part of your insurer’s standard or in-built cover, consider their list of add-ons. Some insurers offer customized add-on covers tailor made for the policyholder’s needs.
Duration of the coverage : Most fire insurance policies need to be renewed every year, but a thorough understanding of the detailed terms and conditions of your policy is imperative. There are some long term Fire Insurance policies that are available for periods of 3 years, 5 years, and even 10 years making them suitable for residential properties and associated risks. On the other hand, certain businesses only require a Fire Insurance policy during certain seasons of the year, for example the cotton industry, or Diwali gifting businesses. These businesses can opt for short term policies that better suit their needs.
Nature of the insured asset : If you’ve insured certain assets like works of art, jewellery, sculptures, antiquities, etc., where the value of the asset can not be easily determined, a valued or valuable policy can be opted for. For fixed assets like building, plant and machinery, you should opt for a reinstatement or a replacement policy, whereas, for fluctuating assets like stocks, declaration and floater declaration policies suit best.
Read more about individual Fire Insurance policies available in India here