PARA 13.2|IC 57, Fire Insurance|ONE LINER|CHAPTER 7:Claims – Legal Aspects

PARA 13.2|IC 57, Fire Insurance|ONE LINER|CHAPTER 7: Claims- Legal Aspects

Insurance exams offered by the Insurance Institute of India (III), consist of various papers either in Life or Non Life or Combined. Here we are providing ONE LINER IC 57, Fire Insurance Chapter 7 “Claims- Legal Aspects” for para 13.2 and III exam . These questions will be very helpful for upcoming promotional exam in 2020.

IC 57 / Fire Insurance is a very important topic in insurance promotional exam. This IC 57 / Fire Insurance paper comes in all GIPSA exams which makes it very important.

♦Chapter 7 “Claims- Legal Aspects”

  1. Processing and settlement of claims requires sound basic knowledge of:
  • The general law of contract
  • The special law of contract,
  • The terms, exceptions and conditions
  1. The special law of contract, that is, principles of common law, as applicable to fire insurance, viz.,
  • Indemnity,
  • Subrogation, Contribution
  • Utmost good faith, Causa Proxima etc
  1. The terms, exceptions and conditions of:
  • The fire policy
  • The extensions of the policy
  • The special policies and clauses
  1. It is the duty of the Insured to observe good faith not only at the pre insurance stage but also during the currency of the policy and especially after the occurrence of a loss.
  2. The Insured has to act “as if uninsured
  3. Apart from notifying the fire brigade personnel, the Insured must take immediate steps to douse the fire to prevent it from spreading and, wherever practicable to remove the property insured to a place of safety, and to protect the salvage (scrap) etc .
  4. The insured must also co-operate with the fire brigade personnel in their efforts to put out the fire or limit the damage.
  5. A building may be so damaged by fire, explosion, cyclone, etc. so as to render it dangerous to adjacent property, because of weakening of its structure and therefore, partial demolition or propping up the structure may be necessary.
  6. Damaged roof may cause further damage to the contents of the building by rain or otherwise and may have to be covered with tarpaulin or temporary repairs may have to be executed.
  7. Give notice of loss to insurers Notice of loss has to be given forthwith so that insurers are enabled to determine, through survey or otherwise, the cause of loss, the amount of loss and to deal with the salvage. Notice has to be followed by a written claim giving full particulars of the loss.
  8. Make a declaration on oath The insured is required to make a declaration on oath or in other legal form of the truth of the claim and of any matters connected therewith. This is rarely insisted on in practice.
  9. Onus of proof (or burden of proof as it is otherwise called refers to the task or duty imposed on someone to prove that what he has stated or affirmed is true.
  10. The onus of proving that the loss was the direct result of fire is on the insured. It is sufficient if he produces evidence that the property is actually damaged or destroyed by fire. He is not expected to further prove the cause of fire, as to how the fire began.
  11. The Doctrine of Proximate Cause-The essence of the insurance contract is provision of indemnity for financial loss suffered by the insured as a result of the happening of an event insured against under the policy.
  12. The active efficient cause, that sets in motion a train of events, which brings about a result, without the intervention of any force started and working actively from a new and independent source.
  13. The fire policy provides for payment of direct losses suffered by the insured from the damage or destruction by fire or other insured peril of certain specified property.
  14. A loss which is not occasioned by the direct action of fire upon the property insured is not a loss by “fire” within the meaning of the policy unless it is proximately caused by fire.
  15. Peril insured against would produce a prima facie damage when the actual instrument of destruction is the natural and necessary consequence of the peril; in other words, apart from the peril the loss could not have happened.
  16.  Excepted perils-The doctrine of proximate cause applies equally to exceptions. If the loss is proximately caused by an excepted peril, there is no liability under the Thus, where a bomb was dropped by an enemy aircraft, sets fire to a warehouse, the loss, though caused by fire, is proximately caused by enemy action.
  17. Rights of Insurers-Under common law, insurers have certain powers and rights which correspond to the duties imposed on the insured viz. to take all reasonable steps to extinguish the fire, to minimise their loss and to save as much as possible of the property insured. It is also important that the insurers should be in a position to determine the cause of loss and assess the extent of loss.
  18. The condition is so worded that the right of abandonment does not exist even if the property or salvage is in the possession of the insurers.
  19. A warranty is an undertaking by the insured
  • that some particular thing shall or shall not be done or
  • that some condition shall be fulfilled or
  • whereby he affirms or negatives the existence of a particular state of facts.
  1.  Representations are statements made orally or in writing before or at the time of concluding the contract. A representation must be substantially true and should be made in utmost good faith in insurance contracts.
  2. A warranty is a condition precedent to the contract and unless it is performed there is no contract. It is perfectly immaterial for what purpose a warranty is introduced, but being introduced, the contract does not exist unless it be literally complied.
  3. Ex-gratia payments are claims which are paid as a matter of grace where the loss is outside the scope of the policy or the liability under the policy, in strict legal terms, is doubtful.
  4. Ex-gratia payments are justifiable as they mitigate any possible hardship that may be caused to the insured if they are not made. Besides, there is legal sanction for such payments by insurers in the ordinary course of their business.

27.Claims correspondence with the insured relating to a claim is marked ‘Without Prejudice’. The words have the effect of leaving the question of ultimate liability under the policy open.

  1. The amount of claim payable under the fire policy is governed by the legal principle of indemnity and is also subject to the terms and conditions of the insurance contract.
  2. Under Fire policies, subject to Contract Price clause, the liability is determined with reference to the price mentioned in the contract of sale.
  3. It is essential to have a clear conception of the expression ‘value’ of property from an insurance point of view. The word is not defined in the fire policy but insurance practice over the years has specified the meaning which is acceptable to all concerned.
  4. Value of a property may be defined as the worth of anything in terms of something else for which it can be exchanged either with other goods or in terms of money.
  5. There are two kinds of value:
  • Value in use
  • Value in exchange
  1. Value in use depends upon various benefits the owner derives from the property by way of income, comfort, pleasure, etc. Value in use is usually measured by the cost of replacing the property less depreciation. This cost is usually a matter of opinion.
  2. Value in exchange is determined by that a buyer will pay for the property or by that it would cost in terms of money to buy similar property at the same place and at the price ruling at the time (market value). This value can be determined fairly easily as a matter of fact, only if there is a buyer and a seller.
  3. The term ‘Market Value’ or actual cash value, in insurance practice, has different meanings in different situations but the objective in all cases is to give effect to the principle of indemnity in a practical manner.
  4. The term ‘depreciation’ refers to reduction in the value of the machinery due to usage, deterioration, wear and tear, rust, corrosion, metal fatigue etc.
  5. The term ‘betterment’ refers to the superior qualities of the replaced machinery such as increased output, reduced consumption of power, lower costs of maintenance etc. due to technological progress and new research.
  6.  The principle of indemnity states that “the insured is adequately indemnified if he is restored to the financial position which he occupied at the time of his loss in relation to the property”.
  7. Temporary repairs may have to be carried to prevent further damage to the building and / or its contents.
  8. The cost of reconstruction is the basis of indemnity. But, the new structure may be of better quality construction than the old one. Therefore, deduction for depreciation is applied.
  9. The causes of deterioration in building materials are decay, corrosion, metal fatigue, wear and tear, etc.
  • Wood is subject to decay when there is moisture and absence of sunlight.
  • Wood also deteriorates by warping and cracking when exposed to the direct rays of the sun.
  1.  The machinery, although old, still performs well for the purpose for which it was designed.
  2. Indemnity is provision of new machinery which will perform similar functions, subject to deductions for depreciation and the insured’s contribution towards betterment.
  3. The machinery destroyed is considered old and out of date in industries where the rates of obsolescence and technological improvement are high.
  4. Partial damage is easier to deal with. The cost of repair to partial damage is payable and depreciation is deducted only if the repairs result in any significant improvement in the repaired machinery.
  5. Wear and tear, rust, corrosion and metal fatigue are the common causes of deterioration in machinery. Some machines have extremely limited life because new and more efficient machines are continuously available and this factor of obsolescence increases the rate of depreciation further.
  6. Electrical Installation is subject to greater wear and tear than other plant and equipment. Heavy machinery is subject to lesser wear and tear than light and delicate machinery. Wood working machinery, machinery used for grinding or mixing tends to wear out fast. Boilers, pipes, pumps and similar items of plant suffer from rusting or corrosion.
  7.  Machine parts which are subject to constant stress may develop metal fatigue; used parts held as spares depreciate heavily; similarly, depreciation on standby machinery is also heavy.
  8. Age merely provides general guidance in estimating depreciation.
  9.  It may be pointed out that depreciation due to wear and tear will vary according to the degree of care that different owners bestow to their machinery; thus ‘maintenance’ is as important as ‘age’ in assessing depreciation.
  10. The indemnity in Fire Insurance provided for these classes of property is replacement cost less depreciation. Damage claims are settled by paying the cost of repair with an allowance for any betterment.
  11. ‘Stock-in-trade’ refers to the merchandise which are held for sale in retail shops or in wholesale

establishments, factories and also merchandise intended for sale and held in warehouses and godowns.

  1. Stock-in-trade in the hands of retailer or wholesaler can ordinarily be replaced, if lost or destroyed. The retailer can buy from the wholesaler and the wholesaler from the manufacturer.
  2. To the invoice price, is added the cost of transporting the goods to the place of loss, but credit must be given for any trade or cash discount or other concessions enjoyed by the insured in the normal course of his business.
  3.  The stocks at manufacturers’ premises may consist of:
  • Raw materials;
  • Stock-in-process; and
  • Finished goods
  1. Raw Materials: Indemnity is clearly represented by the ‘landed cost’ at which such

materials are available at the place and time of fire; in other words market price plus costs of transportation up to the site of fire.

  1. Stock-in-process: The basis of settlement would be the:
  • ‘Cost of raw materials’ ruling at the time of the loss,
  • Consumption of raw materials up to the time of fire,
  • All direct costs of processing up to that stage, which include labour, power, depreciation charges, maintenance expenses on machinery etc., and
  • Indirect costs such as cost of supervisory staff, etc.
  1. Finished Goods: for indemnity purposes, of finished goods which are destroyed, whilst they are still upon the manufacturer’s premises, and whilst they are still the property of the manufacturer, is beset with several difficulties.
  2. The traditional view holds that the indemnity is represented by the net manufacturing cost at the time of fire, that is to say, the manufacturer’s exfactory price less his net profits.
  3. Excise duty, if any, could be added to the value only at the point of time it becomes applicable.
  4. The indemnity should be confined to the cost of raw materials and direct and indirect costs of production, i.e. the cost price to the manufacturer.
  5.  The modern view is that the cost of production, which is merely the sum total of labour, materials and cost of production, does not really indicate the value of the finished property.
  6. Contract Price: If insurance of imported goods (and not goods of local manufacture) which

are sold under a contract, which is cancelled either wholly or to the extent of loss or damage is subject to the contract price clause, the indemnity is based on Contract price.

  1.  Household Goods and Personal Effects: Describes all articles ordinarily and normally found and used in a household. Household goods include furniture, cooking, utensils, domestic appliances,

television, etc

  1.  The term personal effects would include wearing apparel, books, etc.
  2. The term ‘salvage’ means
  • All property covered by insurance which escapes destruction or damage from the operation of an insured peril.
  • The residual value of property which is partially damaged. This property may be reconditioned or sold in order to determine the amount of the loss.
  • The amount of money received from the sale of the damaged property. In
  • fact this may be better expressed as “proceeds from the sale of salvage”.
  1. Assessment of loss may be on a `net’ basis or on a `gross’ basis
  2. In some cases, the sale may be by ‘auction’. Where the insurers take over the salvage the loss is paid gross, and receipts from the sale of the salvage remain with the insurers.
  3. Insurers may also take over the salvage if the insured is unwilling to retain it or unable to dispose it of or insurer wants to investigate the cause of loss etc.
  4. But the insured is not entitled to demand that the insurers shall take over the salvage nor can he abandon the salvage to the insurers.
  5. The principle of indemnity has two corollary principles of contribution and principle of subrogation.
  6.  Rateable proportion of the policy may be defined as that proportion of the loss as the sum insured under the policy bears to the total sum insured under all the policies.
  7. Principle of Subrogation : If the insured is able to recover the whole or part of his loss from a third party responsible for the loss, then to that extent the indemnity payable by the insurers is reduced. Thus subrogation is implied in all contracts of indemnity.
  8.  Subrogation means that the insured’s rights of recovery of loss from a third party responsible for the loss are transferred to the insurers who may recover the loss from the party concerned.
  9.  The Common Law right of subrogation accrues to the insurer only after the insured is indemnified in respect of his loss. The condition in the fire policy modifies the common law in one respect.
  10. This condition provides that subrogation takes place even before indemnification by the insurer. This is considered necessary to enable the insurers to act quickly in proceeding against the third parties, and to ensure that their rights of recovery against third parties are not barred by any applicable Law of Limitation.
  11. The condition also provides that the insured shall render necessary and reasonable assistance to the insurer to recover the loss from any third party who was responsible for the loss.
  12.  Finally, the amount of claim payable is subject to the terms of the policy viz. pro-rata average condition and `excess’ clause.
  13. Pro-rata Average : If there is under-insurance, the amount of claim is proportionately reduced.
  14. Excess clause: There is a compulsory ‘excess’ of 5% of each and every claim in respect of losses by Lightning, STFI, Subsidence, Landslide and Rockslide and Earthquake.
  1.  In respect of Architect’s etc. Fees and Debris Removal expenses, the amount payable is on reimbursement basis of actual fees or expenses, subject to the limits incorporated in the policy.

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