Property Insurance

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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 incurs. Due to the necessity to comply with the authority regulations. Such regulations can relate to the building or other regulations. Passed by the Parliament or bye-laws of any Municipal or local authority.

In simple terms, the government bodies can pass a law that 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 incurred, any damage or destruction before the granting of the local authority clause extension by the insurers, would not cover it.
  • The insurers will not provide coverage for any destruction or damage, the fire insurance policy of the insured does not insure.
  • If served the contractor with a notice for any property or construction site before it caused damage, the extension will not cover it.
  • 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. The extension does not cover such additional costs.
  • The local authority clause extension does not provide for any rate, tax, duty, development charge arising out of capital appreciation for a particular property. A contractor would have to pay for such costs. As stated by the aforesaid regulations or the bye-laws. The extension does not cover 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:

  • Should complete the work of reinstatement, within twelve months after the destruction or damage.
  • If the work can’t complete 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.
  • Can carry out the work wholly or partially at another site. In such a case, it shouldn’t increase the liability of the insurers beyond the mentioned terms of the fire insurance.

Read More: Who Should Buy Fire Insurance Policy?

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

  • Mentioned various insurable objects in the fire insurance policy. If reduced the liability of the insurance company for any such items by application of certain terms and conditions, then the liability of the insurance company under the local authority clause extension reduces as well in the same proportion as above.
  • It is important that the total amount, 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 took a fire insurance policy to protect its construction site against any loss or damage. Caused due to fire-related perils. Also covered the policy for terrorism clause, as the company paid for the additional premium for the same. The policy included the local authority clause as well.

During the terror attacks in Mumbai, the terrorists used the construction site of the company to seek refuge. By the government, orders started the site evacuation immediately. They halted the construction for many days. The site suffered from damage due to a fire initiated by terrorists.

Read More: How is Proximate Cause Determined in a Fire Insurance Policy?

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

As the construction site was under evacuation 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.