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.
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.
If Jyoti buys an excess policy in fire insurance, her claim would settle as per the new price of the items.
