Speaking in a general language, fire insurance is considered to be an insurance against any loss caused due to fire. This is that form of insurance which secures the property of a person from an uncertain incident which carries along with it the possibility of burning down the property into ashes. Fire Insurance and Insurable Interest though remains a very debatable issue.
In the Indian point of view, the term ‘fire insurance’ was initially 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 against in fire insurance policies.”[1]
Considering the fact that this is also a contract of insurance just like any other contract of insurance, all the essentials of a valid contract are vested in it. It is a contract meant to indemnify the losses suffered by the other party specifically due to fire. However, apart from any specific contract meant just to cover the loss caused due to fire, there is a possibility that there will be other contracts of insurance which might be covering the losses caused due to fire by including it under ‘due care’. Thus, a contract for fire insurance is a specific contract which solely relates to the making good of any loss to property caused due to fire considering the fact that the subject matter rests with the terms of the contract.
Now that it has been established that fire insurance has all essentials of a valid contract, ‘consideration’ seems to be taking a very important place in the contract of fire insurance. In this contract consideration is in the form of a premium just like any other contract. Without the payment of premium by the insured person this contract becomes nudum pactum. In Christrie v. North British Insurance Co.[2], it was set out as an established principle that until a premium is fixed by the insurers and agreed to by the assured; there cannot be a concluded contract. In fixing the premium the insurers take into consideration all matters affecting the risk and it is not mandatory that the insurers should consider meticulously and minutely every proposal for insurance that may be presented to them, and to work out the premium to be paid in respect of the property proposed to be insured.[3] A contract for fire insurance generally provides for the following kinds of consequential loss:
- Loss profits whish is estimated according the loss of an estimated amount of loss.
- Standing charges which covers the loss caused by the items of expenditure insured in maintaining the establishment. It includes rent, rates and taxes, insurance premiums, salaries, of servants, interest on loan and may also include general expenses or depreciation of any part of the property which is not actually destroyed by fire directly.[4]
- Increased cost of working includes the additional expenses incurred in keeping the business going during re-instatement.
- Increased cost of re-instatement.
In the case of General Assurance Society v. Chandmull[5], Hidayatullah,J. had held as follows:
“A contract of insurance is a species of commercial transactions and there is a well established commercial practice to send cover notes even prior to the completion of a proper proposal or while the proposal is being considered or a policy is in preparation for delivery. It is a temporary and limited agreement. It may be self-contained or it may incorporate by reference to the terms and conditions of the future policy.”
In a contract of fire insurance, the cause of the fire holds no importance. The primary objective of the insurance policy is to get the loss of the property reimbursed and looking into the cause will give way to a possibility where the object seems to get defeated. However, there are two exceptions to the above; one exception to this rule and that is where the insured or assured voluntarily and willfully sets fires to the insured property or allows others to do the same[6] and the other is where the fire is caused by a cause falling within an exception to the contract.[7]
In order to reimburse the loss and make a payment of insurance amount, it is necessary that the insured has an insurable interest in the property during the occupancy of the property as well as during the damage caused to the same. In Vijaya Kumar v. New Zealand Insurance Co.[8], it was held that “an ordinary bailee is in possession of the goods, therefore he is entitled to insure them for full value because he will be liable for loss or damage to the owner and also he has a lien over the goods.” This statement made the interest of a bailee an insurable interest. Apart from a bailee, even a purchaser who has not got the ownership of the product still has an insurable interest in the property. This was stated on the basis of Section 49 of the Transfer of Property Act which allows a future purchaser to demand the reinstatement of the property from out of the insurance money received by the seller. This was laid down in the case of Gnana Sundaram v. Vulcan Insurance Company[9]. In a 2006 case namely M/s. Oriental Insurance Company Ltd. vs. Sham Lal Matoo[10], it was laid down as follows:
“Insurable interest is not synonymous with legal interest. Thus an interest on an agreement to purchase is an insurable interest. A warehouse man who has assumed the obligation to insure the goods while in his possession has an insurable interest. Even the interest of a bailee is sufficient to establish an interest and an unpaid vendor of goods as an insurable interest in the property.”
Hence, insurable interest in the property is an essential element for the reimbursement and payment of insurance amount because in case of fire insurance, it is irrelevant as to what caused the fire.
*Dr Farrukh Khan is an Advocate and Partner of Law Firm- Diwan Advocates.
[1] Section 2(6)(a), The Insurance Act, 1938.
[2] (1825) 3 Shaw 519 (Ct of Sess).
[3] K.S.N. Murthy and Dr. K.V.S. Sarma, ‘Modern Law of Insurance’, LexisNexis Butterworths Wadhwa, (4th ed., 211).
[4] Polikoff Ltd. v. North British and Mercantile Insurance Co. Ltd., (1936) 55 Lioyd’s Rep 279.
[5] AIR 1966 SC 1644.
[6] K.S.N. Murthy
[7] K.S.N. Murthy
[8] AIR 1954 Bom 347
[9] AIR 1931 Rang 210
[10] AIR 2006 J&K 103
