Fire Insurance

Fire insurance is a contract under which the insurer in return for a consideration
(premium) agrees to indemnify the insured for the financial loss that the latter
may suffer due to the destruction of or damage to property or goods, caused by
fire, during a specified period.

Fire insurance coverage includes mishaps caused due to accidental fire,

lightning, implosion or explosion, etc. And also, man-made perils such as
bursting of water tanks and pipelines or overflowing, leakages from water
sprinkles, and so on.
 Perils Covered
Fire: The policy delivers cover against any kind of damage caused due
to a fire-related accident; however, it does not cover for damages or
destruction caused to the property insured by own natural heating,
fermentation, or spontaneous combustion. Also, damages caused to the
property due to the drying and heating process cannot be treated as
damage due to the fire. Plus, the burning of property insured order of any
Public Authority is taken out from the cover.
Fire!
Lighting: Fire or any other damage caused by lighting is covered by the policy.
For example, lighting can cause a fire or other types of damage like cracks in the
roof or building which fire insurance will cover.
Crack
Explosion or Implosion: The policy covers fire damage caused due to
explosion or implosion. The policy, however, does not cover damage or
destruction caused to boilers, economizers, or other vessels that release
steam and apparatus or machinery that utilizes centrifugal force to
function. Pressure & Boiler Plan Insurance Policy will basically cover
these risks.
 An economizer is a mechanical device that reduces the amount of
energy used to cool a data center or other buildings. It is integrated
into the building's heating, ventilation, and air conditioning (HVAC)
systems. An economizer uses outside air to help control indoor
temperatures and achieve greater energy efficiency.
Explosion
Implosion
Aircraft Damage:

Both fire and other damage to the property caused directly by aircraft or any
aerial device also damages caused by things dropped by aircraft are covered in
the fire policy. However, damages due to pressure waves caused by aircraft
traveling at supersonic speed are taken out from the policy.
Aircraft damage
Impact Damage:

Loss of or visible physical damage or destruction caused to the property insured due
to impact by any Rail/ Road vehicle or animal by direct contact not belonging to or
owned by. In the policy damages occurring to the boundary wall of insured property
are also included in the coverage.

Example
 A falling tree or a car embedded in your wall are common examples of impact
damage
 Commercial vehicles, such as a digger accidentally damage your house.
Impact Damage
 Conditions of Fire Insurance Policy
 Misdescription,
 Alteration,
 Exclusions,
 Fraud,
 Claim,
 Reinstatement,
 Clause,
 Insurer’s rights after a fire;
 Subrogation,
 Warranties,
 Arbitration,
 Purchase interest clause,
 Loss procedures,
 Contribution and average.
 Misdescription

 This condition provides that the policy shall be voidable in the event of
misrepresentation, misdescription, or non-disclosure of any material particulars.
 This condition emphasizes the principle of utmost good faith.
 Alteration
This is known as the Material alteration Condition. Under the following
conditions, the insurance ceases to attach as regards the property
affected.
(a) Removal: If without the consent of the insurer, the property is
removed from one place to another, the insurer is no longer
responsible for any loss arising in relation to the property removed.
(b) Increase in risk: If the risk is increased for alteration the insurer can
either avoid or agreed to continue the contract by charging an extra
premium.
(c) Change of interest: The assignment, or transfer of property, interest
thereon, and policy will be valid only when it has been made after
the express consent of the insurer.
 Reinstatement/Replacement
 Reinstatement shall not be exact or complete but shall be reasonably sufficient.
 Expenditure is limited to the cost of reinstating the property to its pre-fire
condition and the sum insured.
 It is the duty of the insured to furnish all necessary information to the insurer at
his cost.
 Any action done by the insurer regarding reinstatement shall be without
prejudice to the final decision.
 If due to municipal or other regulations in respect of building constructions, the
insurer is unable to reinstate, then liability is limited to such sum as would be
required to reinstate the property if the same could be lawfully reinstated.
Though this condition is hardly practiced, it is inserted for protection against
unreasonable or overstated claims.
 The insurer’s right after a fire
This condition gives the company the right to enter the premises where loss has
occurred, take possession of the property and deal with it or sell such property. The
condition further provides that
 exercise of these rights does not mean admission of loss liability
 forfeiture of the benefit under the policy in case of non-cooperation of the insured.
 the insured has no right to abandon the property whether taken possession by the
insurer or not.
 This condition confers certain rights on the insurer to ascertain the cause and extent
of loss/damage to minimize the damage and to protect the salvage.
 The rights conferred by the condition are exercisable by the insurer at any time until
notice in writing is given by the insured declining claim or such claim is finally
determined or withdrawn.
 The arbitration condition
 Any dispute or difference as to the quantum to be paid under this policy
shall independently be referred to arbitration.
 No dispute can be referred to arbitration if the company disputes or denies
the liability under the claim.
 A sole arbitrator has to be appointed in writing, agreed upon by both parties.
 If the parties cannot agree upon a single arbitrator within 30 days of any
party invoking arbitration, then a panel of three arbitrators can be appointed,
where two arbitrators are selected by the two parties, and the third is chosen
by the two selected arbitrators.
 The award by the arbitrators shall be a condition precedent to any right of
action or suit upon the policy.
 The object of this condition is to ensure that disputes are settled quickly.
Arbitration is less expensive than litigation and is a private process. So, it
avoids undue publicity or press coverage.
 Types
1. Specific Policy: Under it, any loss suffered by the assured is covered only up to
a specific amount that is less than the real value of the property. A specific policy
is an example of under-insurance.
2. Comprehensive policy: It is also known as an all-in-one policy. It covers
losses arising from many kinds of risks, such as fire, theft, burglary, third-party
risks, etc.
3. Valued policy: Under this, the insurer agrees to pay a fixed sum of money
irrespective of the amount of loss to the insured.
4. Floating policy: It covers the property lying at different places against loss by
fire. An average clause will always be there in a floating policy.
5. Average Policy: A fire policy containing an ‘Average Clause’
is called an Average Policy. Under a specific policy (i.e., a policy
without the Average clause), in the event of loss, the insured can
claim up to the full amount of his policy, even if he has under-
insured his property.
Suppose, the property insured for Rs. 10,000 is valued at Rs.
20,000 at the time of loss. This is a case of under-insurance.
In case of policy without an Average Clause, if the loss is say, for
Rs.8,000 the insured can claim this full amount from the
insurer. But, if the policy is ‘subject to average, i.e., if it is an
average policy, the insured will be paid (Rs. 8,000 x 10000 /
20000) = Rs. 4,000 only. Thus under an average 20,000 policy,
the insured is penalized for under-insurance of the property.
6. Adjustable Policy: Adjustable policy is issued for a particular period
on the existing stock. The premium amount is paid in full at the time the
policy is taken. Any variation in the value of the stock covered by the
policy is informed to the insurer by the insured. The insured, on receipt
of such information, endorses the policy in accordance with the change
intimated and the premium adjusted. The premium is finally settled at
the expiry of the policy.
7. Blanket Policy: A blanket policy is issued to cover more than one
named building or property, or all the contents of more than one named
building. Under such a policy, all the fixed and current assets of a
manufacturer or a trade lying in different buildings can be covered by
one policy at the same premium.
 8. Consequential Loss Policy: It is a policy under which the insurer agrees
to indemnify the insured for the loss of profits that he suffers due to
the dislocation of his business caused by fire. It is also known as loss of
Profit Insurance.
9. Valuable Policy: The value of the property insured is determined only at
the time of happening of risk. In case of risk, the market value of the property
would be the basis for payment of compensation.
10. Reinstatement Policy: If the insurer undertakes to reinstate (replace) the
insured property in case of risk, it is called a reinstatement or replacement
policy.
11. Transit Policy: It covers risk due to fire during transit. The policy
commences with the loading of goods in the carriage and ends once the goods
are unloaded at the destination.
 The procedure for Settlement of Fire Insurance Claims
 Intimation to Insurance Company
 Assessment of the loss
 Submission of the claim form
 Original Insurance Policy,
 Copy of Bill of Lading,
 A copy of the Commercial Invoice,
 A copy of the packing list,
 Survey report,
 Claim Bill.
 Evidence of Claim
 Survey
 Landing Remarks
 Appointment of the arbitrator
 Settlement of Claims
Reinsurance
 When multiple insurance companies share risk by purchasing
insurance policies from other insurers to limit their own total loss then
reinsurance occurs.
 By spreading risk, an insurance company takes on clients whose
coverage would be too great of a burden for the single insurance
company to handle alone.
 Premiums paid by the insured are typically shared by all of the
insurance companies involved.
 Reinsurance allows insurers to remain solvent by recovering all or
part of a payout.
 Companies that seek reinsurance are called ceding companies.
 How Reinsurance Works
A primary insurer (the insurance company) transfers policies (insurance
liabilities) to a reinsurer (the reinsurance company) through a process
called cession. Cession simply refers to the portion of the insurance
liabilities transferred to a reinsurer.
Similar to the way individuals pay an insurance premium to insurance
companies, insurance companies pay insurance premiums to reinsurers
for the transfer of insurance liabilities. The diagram below depicts such a
relationship
If one company assumes the risk on its own, the cost could bankrupt or
financially ruin the insurance company and possibly not cover the loss
for the original company that paid the insurance premium.
 BENEFITS OF THE SYSTEM
Reinsurance will bring many benefits to the customer. The most
substantial ones include:
• Better business performance,
• Improvement and optimization of the data ow within the company,
• Lower costs related to the insurance business,
• Lower error rate in this process.
Moreover, it has been proven that reinsurance services with their
integration capabilities provide a great opportunity to expand existing
modules depending on customer requirements.
 Example
Alpha Insurance Company has a reinsurance policy from Delta Reinsurance. When
Alpha sells an insurance policy, Delta takes on 25% of the risk and receives 25% of
the premiums.
Alpha sells a policy with a limit of Tk.100,000, for which their customer pays Tk.100
in annual premiums. From that Tk.100, Delta receives Tk.25.
Later, the customer makes a claim for Tk.50,000, which is covered. Alpha pays the
customer their entire claim of Tk.50,000, and Delta then reimburses Alpha the 25%
(Tk.12,500) that was agreed to under their reinsurance policy.
1. Facultative Reinsurance

• It is called facultative as the reinsurer possesses the “faculty” or power to accept or

reject the entire or a proportion of the provided policy.
• Here, the insurer utilizes it to cover single or multiple risks.
• In such agreements, the ceding company and the reinsurer create a facultative
certificate that states the reinsurer is accepting a specific risk.
• This type of reinsurance can be more expensive for primary insurance companies.
2. Reinsurance Treaty
In this type, the reinsurer agrees to accept all of a specific type of risk from the
primary insurance company. In a treaty contract, the reinsuring company is bound
to accept all the risks that are mentioned in the contract.

The treaty reinsurance demonstrates insurance obtained from another insurer

through the insurance firm. Additionally, this offers extra security for the equity of
ceding insurers and increases safety in relevant or extraordinary situations.
Benefits:
 Covers predetermined risks;
 Treaty reinsurance gives the ceding insurer more security for its
equity and more stability when unusual or major events occur.
 Reinsurance also allows an insurer to underwrite policies that cover a
larger volume of risks without excessively raising the costs
of covering its solvency margins.
 Reinsurance makes substantial liquid assets available for insurers in
case of exceptional losses.
Types of treaty reinsurance
 Quota Share treaty;
 Surplus treaty;
 Excess of Loss treaty;
 Excess of Loss Ratio (Stop-Loss) treaty; and
 Pools.
  Quota Share Treaty Reinsurance
This type of treaty requires the direct insurer to cede a predetermined proportion
of all its business accepted in a certain class to the reinsurer(s), and the
reinsurer(s) also agrees to accept that proportion in return for a corresponding
proportion of the premium.

Example 1: Quota Share; arrangement: Direct Insurer: 20% and All Reinsurers:
80%. The risk assumed: Tk.2,000,000. Therefore, risk distribution will be as
follows:

Ceding Company 20% Tk.20000

All Reinsurers 80% Tk.160000

100% Tk.400000
  Surplus Treaty Reinsurance

The important feature here is that the direct insurer agrees to reinsure only the
surplus amount, after its retention, and the reinsurers agree to accept such cessions,
usually up to a predetermined upper limit. Surplus treaties are usually arranged in
lines, each fine being equal to the insurer’s retention.

This means that the insurer can automatically make a gross acceptance of the risk to
the extent of his retention, plus the amount of retention multiplied by the number of
lines for which a treaty has been made.
Example1: Metro Insurance Co. has received a proposal for fire insurance from a jute
mill for an amount of Tk.1,00,00,000. The company’s retention for this class of business
is Tk.10,00,000; a 9-line surplus treaty exists.
Solution:
The arrangement will be as follows:
Metro’s Retention = Tk.1,000,000
Treaty consumes (9×10 lac) = Tk.9,000,000
Total = Tk.100,00,000
Example-2
Proposition: Same as Example 1, but the sum insured is Tk.7,000,000.
Arrangement will be:
ABC’s Retention: = Tk.1,000,000
Treaty receives: = Tk.6,000,000
= Tk.7,000,000
It will be observed that the treaty receives the balance only after ’ceding Co’s
retention, and even though the treaty has got higher capacity, it is underplaced
because the sum insured itself is lower than capacity, and therefore they get the
full balance of the sum insured.
Example-3
Proposition: Same as in Example – 1, but the sum insured is Tk.15,000,000, and a
treaty upper limit exists for Tk.8,000,000. The arrangement will be:
ABC’s Retention: Tk.1,000,000
Treaty consumes: (upper limit applies) Tk.8,000,000
Automatic cover: Tk.9,000,000
Here such an attempt is violating the principle of reinsurance. The excess retention
of Tk.500,000 will create an additional charge on the company’s fund for which
there is no provision and which attempt is bound to disturb the company’s financial
stability and profitability.
Again, the other is sure to create an adverse impact on the reinsurer’s interest, in
addition to creating a mistrust that is undesirable in this trusted profession.
Example-4
The sum insured is Tk.1,50,00,000. The company’s retention is Tk.20,00,000. A9-line
surplus treaty exists. But their upper limit of the insured risk is Tk.10,00,000. The
arrangement will be as follows:
Metro’s Retention = Tk.20,00,000
The surplus treaty received by 9 reinsurers co
up to the limit Tk. (10,00,000 X 9) =Tk. 90,00,000
Tk.110,00,000
Surplus Risk = (Tk.50,00,000-Tk.110,00,000) =Tk. 40,00,000
That will be distributed among ceding and 9 reinsurance co. =(Tk. 40,00,000/10)
=Tk. 4,00,000
Now,
Risk is taken by ceding company = Tk. (20,00,000+4,00,000)=Tk. 24,00,000
Risk is taken by the (individual) reinsurers =Tk. (10,00,00+4,00,000)X9=Tk.1,26,00,000.
 Important advantages of the surplus treaty
 The cover is automatic as opposed to the facultative system.
 It is less expensive in comparison to facultative, and few procedural
formalities are involved.
 Unlike the quota system, the ceding company can retain whatever it likes, and
the balance only is ceded.
 Unnecessary cession of business and premium is not envisaged.
 This method is of particular advantage to established companies who are
growing concerns and who have scope for gradually increasing their retention
with the increase in financial strength.
 Demerits
 For big liability insurance or protection against losses of a catastrophe
nature, other methods like Excess of Loss or Stop Loss arrangements are
better suited.
 Reinsurers cannot usually apply underwriting judgment for each case,
even though they might have entries into ceding the company’s account
at periodical intervals.
 This method is not suitable for new insurance companies.
  Excess of Loss Treaty Reinsurance

Under this system, unlike facultative, quota, or surplus, the sum insured does not form
any basis, and it is not expressed in terms of proportion or percentage of the sum
insured. Here, the insurer first decides as to how much amount of loss he can bear on
each loss under a particular class of business. The arrangement is such that if a loss
exceeds this predetermined amount, then only reinsurers will bear the balance amount
of loss. Nothing is payable by the reinsurers if the amount of loss falls below this
selected amount. There may usually be an upper limit of liability of the reinsurers
beyond which they will not pay.
Example:
Proposition: Against all public liability insurances, the insurer decides to bear a loss of up to
Tk.100,000 in respect of every loss. The reinsurers agree to bear any balance amount beyond
Tk.100,000. The loss is Tk.200,000. There is an upper limit of Tk.80,000.
The recovery under the reinsurance arrangement will be as follows:
Loss: Tk.200,000. Upper limit: Tk.80,000
Insurer bears: Tk.1,00,000
Reinsurer bears: Tk. 80,000
Insurer again bears the balance because of the upper limit: Tk.20,000
Therefore, Insurer bears Tk.1,20,000
Reinsurer bears Tk. 80,000
Tk.2,00,000
Note: If there had been no upper limit, reinsurers would have borne Tk.100,000.This type of
reinsurance arrangement is particularly helpful in cases of big liability insurances and for obtaining
protection against catastrophe losses
 Excess of Loss Ratio Treaty Reinsurance
 This type of arrangement is also known as STOP LOSS reinsurance and is a bit
different from the Excess of Loss arrangement, even though both base on loss
rather than sum insured.
 Here, a relationship is usually drawn between the gross premium and the gross
claim over a year in a particular class of business.
 The ceding company decides a gross loss ratio up to which it can sustain.
 The arrangement with the reinsurers is such that if at the year-end it is found
that the total of all losses within the class has exceeded the predetermined loss
ratio, then the reinsurers will pay the balance loss to keep the loss ratio of the
ceding company within the ‘predetermined ratio.
 The treaty may contain an upper limit also.
Example1:
Proposition: Company ABC has arranged an Excess of Loss Ratio Treaty with
reinsurers whereby it will bear losses up to an amount not exceeding 70% of the
gross premium of the class. The reinsurers have agreed to bear any balance so that
the ceding company’s gross loss ratio is maintained at 70% but not exceeding, say,
90% of the balance. Ceding company’s premium income is Tk.10,000,000, and the
total loss over the year is Tk.8,000,000.
Solution: The implication of loss distribution will be as follows:
Loss =Tk.8,000,000.
This is 80% of the gross premium, and therefore, reinsurers come into the picture to keep this ‘loss
ratio’ down to a predetermined 70%.
Therefore;
Ceding Co. bears (70% of premium) Tk.7,000,000
Reinsurer pays 90% of Tk.1,000,000 Tk.900,000 (which is the balance of loss)
Ceding Co. again bears balance Tk.100,000
Tk.8,000,000
Therefore, Ceding Co. bears: Tk.7,100,000
Reinsurers pay Tk.900,000
Tk.8,000,000
The students should realize that had there been no upper limit, the full balance of Tk.1,000,000 would
have been paid by the reinsurers, and the predetermined loss ratio of the ceding company would have
been maintained. In this case, because of the upper limit, the predetermined loss ratio has been partly
disturbed.
SL. Topic Marks Total
No Page
.
1 Definition of Marine Insurance. 2 1
2 Warranties Under Marine Insurance 6 4
3 Marine Perils 6 4
4 Clauses covered under the marine insurance policy 8 5
5 Classification of Marine Losses 8 5
6 Settlement of a marine insurance claim 5 2
7 Notice of Abandonment 5 2
Problem1. A building worth Tk. 5,00,00,000 was insured for Tk. 4,00,00,000
under an average policy. The building was destroyed by fire and actual loss was
ascertained at Tk, 3,00,00,000. How much can the insured recover from the
insurer?

Solution: Formula of ascertaining claim under average policy:

Insurance Claim=× Amount of Loss
=×3,00,00,000 =Tk. 240.00.000 (Ans.)
Note: The policy is under insured. So, the insurer will pay Tk. 240.00.000 and
Insured will bear Tk.(300-240)Tk. 60,00,000.
Problem2: The house worth Tk. 100,00,000 was insured for Tk. 60,00,000 under
an average policy. The house was destroyed by fire and actual loss was Tk.
40,00,000. How much the insured can recover from the insurer?
Solution:
Insurance Claim=× Amount of Loss
When,
Tk. 60,00,000
Tk. 100,00,000
Amount of loss Tk. 40,00,000
⸫ Insurance Claim=× 40,00,000 =Tk. 24,00,000
Note: here the policy is under insured. So, the insurer will pay Tk. 24,00,000 and
Insured will bear Tk.(40,00,000-24,00,000) =Tk. 16,00,000. (Ans.)
Problem 3: M & Co. was insured their factory building for Tk. 2,50,00,000 to X
Co. and for Tk. 1,50,00,000 to Y Co. The factory was destroyed by fire and actual
loss was ascertained Tk. 1,00,00,000. How much the insured can recover from the
each insurer?
Solution: Calculation the proportionate contribution of X Co.
= × Amount of Loss
= × 1,00,00,000 = Tk.62,50,000 (Ans.)
Calculation the proportionate contribution of X Co.
= × Amount of Loss
= × 1,00,00,000 = Tk.37,50,000 (Ans.)
Problem3: Mr. Israk was insured his house and also for furniture Tk. 500,000 to A co.
and only for house to B Co. 3,00,000. The loss was happened by fire and actual loss
calculated for house Tk. 2,00,000 and for furniture Tk. 50,000. How much the insurer
recovered from the each insurer?
Solution:
I. Calculation of proportionate contribution, if loss on house pay first:
a) Proportionate contribution of coinsurer A Co.
=× Loss on house
=× 200,000 = Tk. 1,25,000 (Ans.)

b) Proportionate contribution of coinsurer B Co.

=× Loss on house
=× 200,000 = Tk. 75,000 (Ans.)
II. Calculation of proportionate contribution, if loss on furniture pay first:
A Co. will compensate for full loss in furniture Tk. 50,000. So, the loss on house will be
distributed among two companies in the following way:
Remain insured risk only for house Tk. (5,00,000 – 50,000) =Tk. 4,50,000
a) Proportionate contribution of coinsurer A Co.
=× Loss on furniture
=× 200,000 = Tk. 1,20,000 (Ans.)
b) Proportionate contribution of coinsurer B Co.
=× Loss on furniture
=× 200,000 = Tk. 80,000
Ans. If loss on furniture pay first then: Liability of A Co. Tk. (1,20,000+ 50,000)= Tk.1,70,000
and of B Co. = Tk. 80,000.