Fire Insurance Claims and Legal Principles

Fire Insurance Claims and Legal Principles 

Controversy and Facts

In this case, Insurance Company repudiated claim. Reasons given for repudiation were : nature of damage did not support the manifestation of an occurrence which could reasonably and otherwise sustainably be concluded as an occurrence within the terms and conditions of the Insurance Company’s policies. Preliminary Surveyor, after visiting the premises, had concluded that circumstantial evidence indicated electrical short circuiting as the most probable cause of fire. Final Surveyor, after a more detailed investigation, had concluded that ‘after removal of all the debris has resulted in a finding, which precludes the possibility of an accidental ignition of electrical origin.’

Preliminary Surveyor and the final Surveyor in their reports dated 07th October 2010 and 30th March 2011 had stated that there is no coverage available for ‘FFF’ (i.e. furniture, fixtures and fittings) under any of the fire policies.

Insured in its complaint had not specifically pleaded as to what was the basis for claiming an amount of Rs.3,30,93,678/- (amount as per prayer in complaint) or to substantiate the quantity/unit of stocks lost or its unit value and therefore, there was no calculation available on record to contradict the calculation made by the final Surveyor.

Supreme Court's Observations

Fire insurance is a strategic tool for risk management, asset protection and economic resilience. Fire insurance policy does not prevent fire – but it cushions the financial impact when it occurs.  

Contract of fire insurance is a contract to indemnify the Insured against loss by fire. The expression ‘fire’ signifies the cause of the loss and in order to determine whether in a particular case the loss is caused by fire, the following rules generally apply:- a) There must be an actual fire; hence mere heating or fermentation will not be sufficient to render the insurers liable for loss occasioned thereby. There must be something on fire which ought not to have been on fire.There must be something in the nature of an accident, but a fire occasioned by the wilful act of a third person without the consent of the Insured, is to be regarded as accidental for the purpose of this rule.If these requisites are satisfied, any loss attributable to the fire, whether by actual burning or otherwise, is within the contract.

The object of the contract is to protect the Insured against loss occasioned by fire. The fire must be accidental. The dictionary meaning of the expression ‘accidental’ is a ‘happening occurring unexpectedly or by chance’. Consequently, damage from a deliberately set fire will not be covered. To carry out the investigation, therefore, beyond the cause of the loss and to cast upon the Insured the burden of establishing that the cause of the fire itself was covered by his contract, would largely defeat this object.The cause of fire, however, becomes material where the circumstances of the case are open to suspicion, and seem to indicate that it would be contrary to the principle of good faith (doctrine of uberrima fides) inherent in the contract to permit the Insured to recover. Accordingly, the cause of fire becomes material in cases where the fire is occasioned not by negligence but by the wilful act of Insured himself or of someone acting with his privity or consent. In such a case, his conduct, coupled with the making of a claim, is a fraud upon the insurers and he cannot enforce his claim against them. (See: The Law Relating to Fire Insurance by A.W. Baker Welford and W.W. Otter-Barry Fourth Edition).

The precise cause of fire is immaterial provided the Insured is not the instigator of the fire. This judgment underscores the importance of insurers’ duty to act in good faith and honour its commitment to the Insured.

Once it is established that the loss is due to fire and there is no allegation/finding of fraud or that the Insured is the instigator of the fire, the cause of fire is immaterial and it will have to be assumed and presumed that the fire is accidental and falls within the ambit and scope of fire policy. 

It was held that in insurance policy "coverage provisions should be interpreted broadly and in case of ambiguity, it is to be resolved in favour of the Insured."

Conclusion and Findings

Supreme Court concluded that in this case, the aforesaid fire policy does not state that no liability will accrue upon the insurer till the exact cause of fire is proved. The final Surveyor’s conclusion that the fire is not accidental is not correct, as there is no reasoning in the final Surveyor’s report as to why the fire is not accidental. final Surveyor’s report has only found that electric short circuit is not the sole source and that there were three independent sources/seats/pools of fire. But the said finding cannot lead to the conclusion that the fire in question is not accidental.final Surveyor in its report has neither concluded that the incident of fire falls within the exception/exclusion clause of the fire policies nor fraud, negligence or intentional damage by the Insured.

It was held that when “Description of Risk” clearly provides for ‘FFF’ which can only mean furniture, fixtures and fittings." Insured is entitled to the amounts claimed under the heads of Building, Plant and Machinery, Showroom, Electric fittings, furniture and fixtures.

Insurance Company’s argument that cancellation of orders does not prove the actual loss held to be erroneous as figures given in calculation sheet indicating the cancelled orders are supported with the following contemporaneous documents maintained in the regular course of business. 

Court held that the argument of Insured is correct that the purpose of valuation done by the bank is different, inasmuch as, for the Insured the samples are of value, but not to the bank. Destruction of samples on account of fire caused loss to the Insured, who had to arrange for replacement of the samples.

It was held that the sine qua non for calculation of depreciation is the age of machinery and the accepted rate of depreciation for the products. Without specifying these two ingredients, the Surveyor could not have assessed depreciation – as has been done in the present case.

The salvage as assessed by the Surveyor for stock is misconceived as the products in question are leather products which are worthless in the event they are damaged by fire and/or water.

Basis for rejecting the insurance claim by the final Surveyor and Insurance Company is contrary to record, untenable in law and suffers from arbitrariness and perversity. Supreme Court held that claim is payable. 

It was held that when a genuine insurance claim is repudiated, then insurance company would have to pay principal amount of claim plus interest amount starting from 3 months from the date of incident till date of actual payment. 

Case Reference is Orion Cornmerx Pvt Ltd v NICL [2025] GCtR 1634 (SC).

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