The purpose of a fire insurance policy is to offer you financial coverage in case of loss or damage due to fire and related perils. At the time of taking a fire insurance policy, you would have to compute the price of the items which you want to cover. However, the prices of these items can fluctuate over the years due to the impact of inflation. To combat such issues, it is advised to go with an excess policy in fire insurance, which is bought to cover additional risks which are beyond the cover of the first fire insurance policy.
Key Takeaways
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Combating Inflation: As seen in Case 1 (Ravish Shukla), the market price of goods can rise significantly over time. An Excess Policy ensures that your claim is settled based on current market values, rather than the outdated prices listed when you first bought the policy.
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The “Two-Layer” Strategy: Instead of buying one massive, expensive policy for your maximum stock, you buy a “First Loss” policy for your average stock and an “Excess Policy” for the rest. This significantly reduces your total premium outgo.
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The Penalty of Refusal: Case 2 (Jyoti) serves as a warning. Without an excess policy, any increase in the price of your goods is ignored during a claim. You are only compensated based on the historical price mentioned in the policy, leading to a financial shortfall.
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Monthly Declarations: This policy is dynamic. You must declare your actual stock values every month. The final premium is then adjusted based on the average of these monthly “excess” amounts.
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Cost-Effectiveness: Because the insurer knows the chance of you needing the entire excess amount is lower than needing the base amount, the premium rate for the excess layer is much more competitive.
It is a very useful feature that can be considered by those people whose stock fluctuates from time to time. In this case, buying the first loss policy for the minimum stock value, and purchasing an additional excess policy to cover an anticipated fluctuation in the price of the stock.
Every month, it is necessary to declare the actual value of the stock. And computing the premium on the basis of the average monthly excess amount.
As the chances of paying the excess amount are few, the fire insurance policy premium rate is also very low. It means the policyholder would be paying a nominal premium amount as compared to the total premium payable if the fire insurance policy had been specific in nature.
Case: 1
After running his footwear business from home, itself, Ravish Shukla took office space on lease in Pune. Along with equipping his office space with fire extinguishers, etc.; Ravish also decided to buy a fire insurance policy for his office space. To ensure sufficient coverage, he calculated the cost of all the items and purchased the fire insurance accordingly. He also included his footwear stock in the fire insurance policy. At the time of buying fire insurance, Ravish also discussed the provision of excess with the insurance company. And purchased it after paying a nominal premium amount.
Read More: What is the Scope of Fire Insurance Policy?
Last year, Ravish’s office caught fire due to short-circuit. Though, firefighters immediately doused the flames, the goods worth Rs 20 lakh got damaged. As Ravish had a fire insurance policy, he approached the insurer for the claim settlement. In this case, the insurer appointed a surveyor who visited the office space to calculate the extent of damages.
After the survey, the insurer submitted its report on the basis of which the fire insurance company agreed to settle the claim. As the fire insurance coverage was Rs 50 lakh, the insurer settled the claim accordingly.
Here it is important to note, Ravish had bought an excess policy in fire insurance. It means, at the time of buying the insurance, the value of the stock was Rs 5 lakh, which increased to Rs 10 lakh over the years. As the value of the stock was more than what it was at the time of purchasing the fire insurance, the insurer considered the fluctuation in the price of the stock and settled the claim accordingly.
Case: 2
Jyoti has been in the fashion business for the last five years. She is a leading exporter of fashion jewelry to countries like Malaysia, Sri Lanka, etc. To protect her business and herself from various losses and damages, she purchased a fire insurance policy as well. Before issuing the policy, the insurer asked for the cost of the items and then issued the fire insurance policy accordingly. At the time of policy issuance, the insurer recommended buying an excess policy in fire insurance, however, she refused it.
Read More: How Do the Insurance Principles Apply to Fire Insurance Contracts?
Sadly, a fire broke out at her office space and damaged goods worth Rs 5 lakh. As she had a fire insurance policy, she approached the insurer to get her claim settled. Here the insurer appointed a surveyor to inspect and ascertain damages. Found out the loss of Rs 6 lakh. Unfortunately, there was a rise in the price of goods at the time of purchasing the insurance. However, Jyoti did not buy the excess policy in the fire insurance and as a result, the insurer settled her claim. As per the price of the goods, mentioned in the policy document at the time of purchasing the fire insurance.
Summary: Excess Policy in Fire Insurance
If Jyoti buys an excess policy in fire insurance, her claim would settle as per the new price of the items.
Frequently Asked Questions (FAQs)
Q1: How is an “Excess Policy” different from a “Declaration Policy”?
A) In a Declaration Policy, you have one single policy for the maximum amount. In an Excess Policy, you have two separate policies: one for the stable base amount and a second one for the fluctuating amount. The Excess Policy is often cheaper for businesses with a very consistent minimum stock level.
Q2: Can I buy an Excess Policy for my furniture and fixtures?
A) Usually, no. Excess policies are designed for stocks and inventory because those are the items that fluctuate in quantity and price. Fixed assets like furniture or machinery are better covered under a standard “Reinstatement Value” policy.
Q3: What happens if I forget to make my monthly stock declaration?
A) If you fail to declare your monthly values, the insurer will typically assume the full sum insured of the excess policy was at risk. This could result in a higher premium adjustment at the end of the year, similar to the rules of a declaration policy.
Q4: If a fire happens, do I have to file two separate claims?
A) No. While there are two policies, the claim process is unified. The surveyor will assess the total loss and apply the Base Policy first; any amount exceeding the base limit will then automatically be covered by the Excess Policy.
Q5: Is the premium for an Excess Policy refundable?
A) Like the declaration policy, the premium is provisional. If your actual average stock was lower than what you paid for, you might be eligible for a refund of a portion of the premium at the end of the year, depending on the insurer’s specific terms.
About The Author
Shivani
MBA Insurance and Risk
She has a passion for property insurance and a wealth of experience in the field, Shivani has been a valuable contributor to SecureNow for the past six years. As a seasoned writer, they specialize in crafting insightful articles and engaging blogs that educate and inform readers about the intricacies of property insurance. She brings a unique blend of expertise and practical knowledge to their writing, drawing from her extensive background in the insurance industry. Having worked in various capacities within the sector, she deeply understands the challenges and opportunities facing property owners and insurers alike.
