A local authority clause in the fire insurance policy extends to cover the additional cost of reinstatement of the destroyed or damaged property that has been insured accordingly. This clause comes to effect when such an additional cost is incurred due to the necessity to comply with the authority regulations. Such regulations can be related to the building or other regulations which are passed by the Parliament or bye-laws of any Municipal or local authority.

In simple terms, the government bodies can pass a law which may require the contractors to act as per the regulations. Due to such an act, the contractors can incur huge losses. When a fire insurance policy has the local authority clause, it covers the additional losses incurred by the contractor.

However, the extension provided in this clause does not cover the following scenarios:

  • If the contractor incurs any cost for complying with the aforesaid regulations or bye-laws, such cost is not covered by the local authority clause of the fire insurance
  • If the contractor has incurred any damage or destruction before the granting of the local authority clause extension by the insurers, it will not be covered.
  • The insurers will not provide coverage for any destruction or damage which is not insured by the fire insurance policy of the insured.
  • If the contractor is served with a notice for any property or construction site before it was damaged, it will not be covered by the extension.
  • In the case when there are no aforesaid regulations of bye-laws implied by the authority, and the contractor incurs the additional cost of making the damaged or the destroyed property to a condition when it was new, such additional cost is not covered by the extension.
  • The local authority clause extension does not provide for any rate, tax, duty, development charge rising out of capital appreciation for a particular property. A contractor is required to pay for such costs as stated by the aforesaid regulations or the bye-laws. The extension does not cover for the same.

Period of reinstatement:

If, due to the regulations of the government authority, the contractor or the insured requires any reinstatement work, then it is important for him to adhere to the following points:

  • The work of reinstatement should be completed within twelve months after the destructions or damage.
  • If the work cannot be completed within the period of twelve months, the contractor must get a clean chit in writing from the insurance company (within the twelve months period) about the extended period that he may require for the reinstatement work.
  • The work can be carried out wholly or partially at another site. In such a case, it should not increase the liability of the insurers beyond the mentioned terms of the fire insurance policy.

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Apart from these above points, other major aspects of the local authority clause are as follows:

  • There are various insurable objects mentioned in the fire insurance policy. If the liability of the insurance company is reduced for any such items by application of certain terms and conditions, then the liability of the insurance company under the local authority clause extension is also reduced in the same proportion as above.
  • It is important that the total amount which is recoverable on any item of the policy does not exceed the sum insured.

Case Study:

D.F construction company situated in Mumbai was a well-known name in the construction industry. The company had taken a fire insurance policy to protect their construction site against any loss or damage caused due to fire related perils. The policy also covered for terrorism clause, as the company was had paid for the additional premium for the same. The policy included the local authority clause as well.

During the terror attacks that took place in Mumbai, the construction site of the company was used by the terrorists to seek refuge. The site was evacuated by the government orders immediately. The construction was halted for many days. The site suffered from damage due to fire initiated by terrorists.

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After the situation was brought under control, the construction company contacted its insurers to cover for the damage caused.

As the construction site was evacuated and closed for many days by the orders of the government, the company benefitted from the local authority clause mentioned in their policy document. Also, the company had bought an add-on cover for terrorism. The insurers successfully settled the claim of the construction company.