Add-ons & Extensions in Fire Insurance

Why add-ons exist

The classic Standard Fire and Special Perils Policy (SFSP) covers twelve named perils and settles on the basis written into it. Add-ons and extensions broaden the policy beyond that, and most of them carry extra premium.

IRDAI's standard Bharat products build several of these covers into the base policy, so what is an add-on under the classic SFSP may already be included there. The policy schedule shows which extensions a particular policy carries.

Extra perils

Earthquake (fire and shock) and terrorism are two of the common extensions. Terrorism cover in India is supported by the Indian Market Terrorism Risk Insurance Pool, formed in April 2002 by the general insurers and administered by GIC Re, the national reinsurer.

Spontaneous combustion is self-ignition from a material's own heating. It is a real risk for coal, oilseeds, some chemicals, cotton and jute, and the classic SFSP excludes it unless the extension is bought. It therefore matters most to coal yards, oilseed stores and chemical facilities. Forest fire, and impact damage by the insured's own vehicles, are other covers added by extension, as is omission to insure additions. Bush fire is one of the named perils; forest fire is a separate extension.

Extra costs and lost rent

After a serious fire the owner pays architects, surveyors and consulting engineers to plan the rebuilding, and pays to clear the site. The classic SFSP covers these professional fees only up to 3% of the claim amount, and debris removal only up to 1% of the claim amount. Clearing damaged structures, especially industrial property with hazardous materials, can cost far more than that; cover beyond the built-in share needs the extension.

The loss of rent add-on compensates a property owner for rental income lost while the property is being repaired after damage by an insured peril.

Changing the sum insured and the settlement

An escalation clause lets the sum insured rise automatically, day by day, up to a chosen percentage over the policy year, to keep pace with rising replacement costs. The insured chooses the percentage and pays extra premium for it.

The reinstatement value clause changes the basis of settlement from indemnity value, with depreciation, to replacement value, without it. The insurer pays the cost of repair or replacement as new, provided the property is actually reinstated. If it is not reinstated, settlement falls back to the market-value basis.

Rules at a glance

Key points

• Add-ons widen the classic SFSP and mostly carry extra premium; the standard Bharat products build several of them in.
• The terrorism pool was formed in April 2002 by the general insurers and is administered by GIC Re.
• Spontaneous combustion is excluded from the classic SFSP unless the extension is bought.
• The base SFSP pays professional fees up to 3% and debris removal up to 1% of the claim amount.
• An escalation clause raises the sum insured day by day up to a chosen percentage over the year.
• The reinstatement value clause removes depreciation, provided the property is actually reinstated.

Common misunderstandings

• Terrorism and earthquake are not automatic under the classic SFSP: each is an extension, although the standard Bharat products include earthquake.
• The 3% and 1% limits are not percentages of the sum insured: they are percentages of the claim amount.
• The reinstatement value clause does not pay new-for-old on a promise to rebuild: if the property is not actually reinstated, settlement is on the market-value basis.

Questions people ask