What is fire insurance and how does it work?

• Fire insurance protects against loss from fire & allied perils; SFSP policy common.
• Sum Insured is maximum payout; Average Clause reduces payout if underinsured.
• Covers fire, explosion, riots, floods; excludes war, negligence, theft, breakdowns.

Fire insurance is a core component of property risk management and one of the most widely used forms of general insurance in India. Regulated by the Insurance

Regulatory and Development Authority of India (IRDAI), fire insurance policies have been standardised in recent years to improve clarity, transparency and claim certainty. This piece outlines what fire insurance is, how it works, what it covers, and why it matters in the Indian context.

What Is Fire Insurance?

Fire insurance is a contract of indemnity that protects property owners from financial loss or physical damage caused by fire and specified allied perils. It does not generate returns and is not an investment product. Instead, it restores the insured to the same financial position they were in immediately before the loss, in line with the Principle of Indemnity.

In India, fire insurance is commonly issued through the Standard Fire and Special Perils (SFSP) Policy. For households and smaller businesses, IRDAI has introduced simplified, standard products such as:

• Bharat Griha Raksha (homes)
• Bharat Sookshma Udyam Suraksha (small enterprises)
• Bharat Laghu Udyam Suraksha (medium enterprises)

How Does Fire Insurance Work?

Sum Insured and Valuation
The Sum Insured represents the maximum amount payable by the insurer. Policyholders choose the valuation method:

• Market Value: Asset value after depreciation
• Reinstatement Value (RIV): Cost of replacing the asset with a new equivalent, without depreciation

RIV is commonly used for buildings, plant and machinery where continuity of operations is critical.

The Average Clause
If property is insured for less than its actual value, the Average Clause applies, reducing claim payouts proportionately.

Formula

Claim = (Sum Insured ÷ Actual Value) × Loss Amount

For example, insuring a Rs 10 crore asset for Rs 8 crore means only 80 per cent of any loss will be paid. The Bharat Sookshma Udyam Suraksha policy provides a 15 per cent waiver on underinsurance, easing this burden for small businesses.

Premium Determinants

Premiums depend on:

• Nature of occupancy
• Seismic zone location
• Fire safety measures like sprinklers and hydrants

What Does Fire Insurance Cover?

Fire insurance in India operates on a named-peril basis. Under the SFSP policy, coverage includes:

• Fire and lightning
• Explosion or implosion
• Aircraft damage
• Riot, Strike and Malicious Damage (RSMD)
• Storm, flood and inundation (STFI)
• Impact damage from third-party vehicles or animals
• Subsidence and landslide
• Missile testing operations
• Bush fire (excluding self-ignited forest fires)

What Is Not Covered?

Standard exclusions include:

• War, invasion and nuclear risks
• Wilful negligence or deliberate acts
• Pollution or contamination (unless caused by an insured peril)
• Theft or burglary
• Electrical or mechanical breakdown of equipment (though resulting fire damage to surrounding property is covered)

Add-Ons and Extensions

Common extensions include:

• Terrorism cover (purchased separately)
• Removal of debris
• Architects’ and surveyors’ fees
• Loss of Profit (Consequential Loss) insurance for business interruption

Key Benefits of Fire Insurance

• Protects balance sheets from catastrophic losses
• Mandatory for bank loans against property or stock
• Supports business continuity through reinstatement coverage
• Absorbs hidden costs such as debris removal

Bottom Line

Fire insurance in India has evolved into a structured, regulator-driven risk protection framework. Whether for homes or enterprises, it remains essential for safeguarding assets against one of the most severe and unpredictable risks.