The insurance industry uses the terms like risks, perils and hazards to differentiate between various conditions of insurance. The possibility of loss is denoted by the term ‘risk’, whereas the term ‘peril’ denotes the cause of the loss. The condition that increases the possibility of the loss is denoted by the term ‘hazard’.
Physical hazards in fire insurance mean any physical condition that increases the possibility of a loss. These physical hazards can include any material, structural, or operational features of the business. Such physical hazards create or increase the opportunity for injury or damage caused due to fire.
The insurance company needs to have a detailed knowledge of the physical hazard while underwriting the policy and deciding whether to accept the risk. This helps them to decide the insurance terms, rates, nature, premium and other conditions for the fire insurance policy. The physical hazards in the fire insurance indicate the dangers of the subject of the insurance. Such hazards can be identified by the inspection of the risk.
Following are the physical hazards in the fire insurance:
Nature of the construction material:
Here the physical hazards are the material used in construction. The nature of the material, whether they are combustible or non-combustible plays an important role here.
The lighting and the heating system in the premises:
The system of the lighting and the heating in the premises can be a physical hazard. The wire and the cable material of the building can cause a fire. It is essential that these elements are in good shape and are not worn-out.
Fire can spread easily if there is rubbish scattered everywhere. Such rubbishes can be of a hazardous nature as far as the fire insurance is considered.
Smoking cigarette in the premises:
Smoking is the enemy of the inflammable materials. Especially in factories, where there is combustible material present, indiscriminate smoking becomes a physical hazard.
Nature of business occupation:
Any business involved in the usage of petroleum, kerosene or chemicals, the probability of the hazard increases. Such materials are considered as physical hazards in fire insurance.
Nature of the adjoining premises:
A fire can spread quickly from the adjoining premises to the premises of the insured. Hence the nature, construction, and the occupation of such adjoining premises are considered as the physical hazard.
‘Rajdeep Clothing Ltd’ factory was a well-known name in the cloth manufacturing industry in Kolkata. Being in the business since two decades, the factory was involved in manufacturing men’s apparels like shirts and trousers.
Since the factory was into the business for a long time, the owners of the factory had taken a fire insurance policy to protect them. In April 2014, a fire broke out in the factory. It engulfed the entire shipment material which was to be exported to Hyderabad. The company lost two lakh rupees due to the fire break out.
The owners contacted their insurers immediately. A surveyor was sent by the insurance company to investigate the scenario. Upon investigation, the surveyor found out that the fire was caused due to the short-circuit in one of the electronic boards situated in the production room. The wiring material was of sub-standard quality and hence gave rise to a short-circuit scenario.
Since the cause of the fire was a physical hazard like faulty wiring material, the insurers agreed to settle the claim. The entire loss of two lakh rupees was settled successfully by the insurance company. Thus, the fire insurance policy secured by ‘Rajdeep Clothing Ltd’, helped the company to mitigate the amount lost.