Fire insurance is a specialized form of insurance. It is designed to cover the cost of replacement, reconstruction or repair beyond what is covered by property insurance policy. Fire insurance has evolved to provide financial protection to a person or organization against the risk of losses due to fire. 

Fire insurance is the most important type of insurance which provides the security against the risk of fire. Fire insurance is a contract of indemnity whereby the insurer undertakes to indemnify the insured against the financial loss caused by an event of fire to the extent of actual loss or the insured amount whichever is lower. The insurer doesn’t compensate the insured amount if the insured property is damaged by less than the insured amount. The insurer doesn’t compensate more than insured amount even if the loss is estimated more than insured amount. The concept of fire insurance was developed before the concept of life insurance.

According to M. N. Mishra, "Fire insurance is a device to compensate for the loss consequent upon the destruction of properties by fire."

Therefore, fire insurance is a contract between the insurer and the insured at which the insured pays specified sum of premium to the insurer till the maturity of the contract and the insurer compensates the loss of property of the insured damaged from accidental fire within the period of contract.

 

B. On the basis of goods

1. Floating Policy
A floating policy is issued to compensate the loss gods lying in different locations at warehouses, godowns, ports or railway yards etc. using single policy. This policy covers kinds of stocks and properties of a single owner in different places once for a single insured sum.

2. Adjustable policy
According to the changes of the stock, the insured amount is also changed. The premium is calculated according to the insured amount and the insured amount changed. Under this policy, the insured amount and the premium are determined on the basis of stock held by the insured n the beginning.

3. Excess policy
An excess policy is supplementary of fire insurance policy. It is purchased to cover additional risks beyond the coverage of original loss policy. The kind of fire policy is purchased by such merchants whose stock fluctuates from time to time. In this policy, the actual value of the excess stock is declared in a certain period of time.

4. Declaration Policy
Under this policy, the insurance of maximum amount of goods is made on the basis of past experience. The three-fourths of the premium payable is charged from the insured in advance, at the beginning of the contract. Every month the policyholder is required to declare the value of the present stock. At the end of the year, the amount of premium is determined for the whole year on the basis of the evaluation of monthly stock.

 

A. On the basis of indemnity

On the basis of indemnity, fire policies are classified as follows:

1. Valued Policy

In this policy, the value of the subject-matter is agreed upon at the time of taking up the policy. These policies are generally issued for those goods or property whose value cannot be determined after their loss or damage. These goods include works of art, jewellery, paintings, etc. The policy is named as valued policy when the agreed value of subject matter is mentioned in the policy. This value may not necessarily be the actual value of the property. In the event of loss of the fire, the insurer pays the admitted value of the property.

2. Specific Policy
Under this policy, the insurer indemnifies the entire loss of property f it is within the insured amount. This is a fire insurance policy without "Average Clause." This policy is used when insurance of property is made less than the actual amount. In the case of loss of property, the insurer will pay the loss amount if it is less than the specified amount.

3. Average Policy
A policy which contains average clause is called an average policy. In this policy, the compensation payable is proportionately reduced if the value of the policy is less than the value of the property insured. Suppose, a person takes up a fire insurance policy of Rs. 30,000 and the value of the property are Rs. 40,000. If there is a loss of property worth Rs. 20,000, the underwriter pays compensation of Rs. 10,000 that is 50%. It discourages the insured to get the under-valued policy.

4. Valuable policy
Under this policy, the property whose value may be difficult to determine after their loss and damages. The market value of the property at that time will be taken as the basis for the valuation and compensation of loss. This policy really follows the principle of indemnity.

5. Replacement Policy
Under this policy, the insurer does not compensate the loss in cash but replace the property destroyed. This policy is also known as new for an old policy where old property damaged by fire is replaced by new property. 

B. On the basis of goods

1. Floating Policy
A floating policy is issued to compensate the loss gods lying in different locations at warehouses, godowns, ports or railway yards etc. using single policy. This policy covers kinds of stocks and properties of a single owner in different places once for a single insured sum.

2. Adjustable policy
According to the changes of the stock, the insured amount is also changed. The premium is calculated according to the insured amount and the insured amount changed. Under this policy, the insured amount and the premium are determined on the basis of stock held by the insured n the beginning.

3. Excess policy
An excess policy is supplementary of fire insurance policy. It is purchased to cover additional risks beyond the coverage of original loss policy. The kind of fire policy is purchased by such merchants whose stock fluctuates from time to time. In this policy, the actual value of the excess stock is declared in a certain period of time.

4. Declaration Policy
Under this policy, the insurance of maximum amount of goods is made on the basis of past experience. The three-fourths of the premium payable is charged from the insured in advance, at the beginning of the contract. Every month the policyholder is required to declare the value of the present stock. At the end of the year, the amount of premium is determined for the whole year on the basis of the evaluation of monthly stock.

C. On the basis of risk covered

1. Comprehensive Policy
A policy may be issued to cover risk like fire, explosion, lightning, burglary, riots, labour disturbances etc. This is called a comprehensive policy. This policy is also known as all in one policy or all risk policy. After purchasing this policy, insured gets the protection of properties against losses during specified period. The premium rate is higher in such policy.

2. Consequential loss policy
A consequential loss policy is one which indemnifies not only the direct loss caused by fire but also other indirect losses such as loss of net profit due to expenses. The consequential loss policy provides indemnity to the insured for loss of income, payment of expenditure like rent, salary etc.

3. Blanket policy
Under Blanket policy, all the fixed and current assets of a manufacturer or a trade of different buildings can be covered by one policy at the same premium. For example, the insurance of all subject matters located in different areas can be affected under this policy.

The following steps are observed while effecting fire insurance policy:

1. Filling up Proposal Form
The insurance company provides proposal form which must be filled by the client by considering the principle of utmost good faith. Many questions are included in it. Generally, the name, address, and occupation of the prospective policyholder, value and nature of the property to be insured, type of policy required and the sum insured, other particulars as required by the proposal form should be filled in the proposal form.

2. Evidence of Respectability
Evidence of respectability recommends that an individual is respected personnel and has a good character. Evidence of respectability is the process of collecting evidence of written proof from any respective person or any firm about the moral character, honesty and financial position of the proposer. Since the insurance policy covers a high degree of moral hazards, these considerations are to be kept in mind. The proposer may submit this report only if necessary.

3. Survey of the Property
All people are not honest therefore insurance company appoints the survey. It is the physical verification of the proposed insurable property. The surveyor observe the location and the arrangements made for the protection of the insurb=able property and prepare a report. The report is submitted to the insurance company. On the basis of the report of the surveyor, the insurer accepts or rejects the policy.

4. Accepting Proposal and Issuing of cover note
After the receipt of surveyor’s report, it is scrutinized to see whether risks is acceptable. The insurance companies takes the decision whether to accept or reject the proposal on the basis of the surveyor's report, the evidence of respectability and the information give in the proposal form. It must be very careful. If any negative information is found they should be rejected.

5. Issue of Final Policy
The insurance company prepared and issues a legal and formal document of insurance. The policy document is prepared after the issue of cover note. It is duly stamped document which contains terms and conditions of the insurance. This is very important document because any dispute and misunderstanding between the insured and the insurance company are settled on the basis of this document.