How Does Fire Insurance Work?

Everything you need to know about Fire Insurance.

Insurance comes in many forms. We have life insurance to protect your family after you are gone, homeowners insurance to protect your home, health insurance to take care of your medical expenses, automobile insurance to protect your vehicle and many more such as renters insurance, fire insurance, etc.

What is Fire Insurance?

According to the fire insurance definition, it protects your property and covers any damages or losses caused by a fire. It is usually purchased along with homeowners insurance or property insurance and helps cover the costs of replacement, repairs or reconstruction of the property. Fire insurance provides additional coverage above the limit already set by property insurance. So whatever that property insurance will not cover, fire insurance will.

How Does Fire Insurance Work?

Fire insurance benefits include fires that were brought on by fault wiring, electricity and gas explosions as well as fires caused by lightning and natural disasters. Fire insurance might also cover burst or overflowing pipes.

Fire insurance coverage does not depend on whether the fire originated from inside or outside the home. It will cover all damages regardless of where it started from. Moreover, the coverage limit does depend more or less on the cause of the fire.

The reimbursement of the costs can either be on a replacement cost basis or an actual cash value (ACV) basis for damages. And if the home is too damaged to renovate and is considered a total loss, the coverage will provide the policyholder the amount according to the current market value of the place. Typically, the insurance also provides compensation according to the market value of the possessions lost or damaged in the fire. The total payout will be capped based on the home’s overall value.

For example, if the house has been insured for $350,000, the contents will usually be covered for 50-70% of the policy value. However, many policies also limit how much is reimbursed for valuable possessions like paintings, jewelry, etc.

Does Homeowners Insurance Cover Fire Damage?

Homeowners insurance does usually provide fire coverage but it is not extensive enough as a fire insurance would be. A homeowners insurance will include the basics of fire coverage whereas fire insurance has been specifically designed to protect the policyholder’s home and possessions from any loss or damage due to a fire. This policy obviously covers all aspects of damages that can occur from a fire. So if you live at a place where there is usually a risk of forest fires spreading till homes, you should have fire insurance to protect you in case an unfortunate accident was to occur. This is especially important if you tend to have valuable items on your property like valuable paintings, jewelry, etc.

A fire insurance policy will also typically include coverage from smoke or water damage resulting from a fire. This coverage is usually effective for about a year. Fire insurance policies can also be renewed if they are close to expiring by the policyholder at the same terms as before with the same premiums.

It is important to note that the home’s value should be checked each year so the insured can determine whether there is a need to increase coverage or not. What this will do is protect your home without you having to pay additional costs out of your own pocket in case the damage is irrevocable. Now, this does not mean that a policyholder should try to get coverage that is more than the total value of their home as no insurance company would do that. However, if you have some extremely expensive or valuable pieces, the insurance company might offer you separate and independent coverage to protect the valuable pieces that are not otherwise covered by the fire insurance policy.

Fire insurance does not only cover your home but also any detached structures on your property like sheds, garages etc, will be covered. Some policies also pay for damages to landscaping such as burning of trees or shrubs, etc. You should search the market and look at all the options available so you can figure out which insurance company is better suited for your needs. If you do not have extra structures on your property that are independent from the main house, you would not need extra coverage which will save you the cost in premiums.

How to File a Claim For Fire Insurance

If there is a fire on your property, you will have to file a claim with your insurance company so you can have the damages covered. Make sure to properly take pictures of the damaged property so it is easier for your claim to be accepted and also so that your claim is well documented. The insurance company will then send a claim adjuster to your house so the damage can be assessed. You should verify their identity when they arrive as scams are possible through this way. Then you should walk them through your property and make sure they see every little damage caused by the fire or smoke.

The next step then would be to receive an estimate and when you do, be sure to review everything carefully so you can check whether the estimate is the same as the coverage you bought and paid for. It is important to know your fire insurance clauses and warranties while filing a claim.

What Does Fire Insurance Not Cover?

Although your homeowners insurance policy will pay for damage to your home up to the policy limits for fire damage, fire insurance helps pay for anything that the homeowners insurance does not cover. Damage caused by war, nuclear damage, and other associated perils are usually excluded in most policies. Arson, which means deliberately setting one’s home on fire, is also not covered along with fire damage to a vacant home if the vacancy had been for more than 30 consecutive days. These 30 consecutive days matter if they were around the time of the fire. However, if you need to cover a vacant home, you can purchase a vacant homeowners insurance policy.

It is possible for your insurance company to charge higher premiums depending on where you live. For example, if you live in an area that has a high risk of wildfires, you may have to face certain limitations. It is essential to check the wildfire coverage in your policy as it is now one of the biggest reasons for destruction.

Replacement Cost vs. Actual Cash Value

It is necessary to know whether your insurance policy pays actual cash value (ACV) or replacement cost for property damaged during a fire. ACV coverage through your homeowners insurance may not be enough to cover the losses and damages of the items you lost in the fire based on today’s market value. If that’s the case, you can add additional endorsement to your insurance policy so you can cover the replacement cost.

Actual cash value vs. replacement cost can help you when rebuilding your home since the cost to rebuild may be significantly higher than the home’s actual cash value. However, with the replacement cost option, you can replace the damaged items with a new item that is of similar quality and cost. However, this means your premiums will definitely be higher.

Fire Insurance for Business Owners

Fire damage to a business is typically covered in the basic business owner’s policy. This includes damage to your business building, attached and detached structures, office equipment, and inventory. Most business owner’s insurance policies will also pay for additional operating expenses if you must move your business operations to a temporary location. It is important to keep an up-to-date inventory of business equipment and other valuable business items. You should also keep important documents off site, so they are not destroyed in a fire.

Do I Need Fire Insurance?

Your home is one of your most important investments, and fire and homeowners insurance policies both aim to protect you from a financial disaster. If you have a mortgage, your lender will require you to purchase homeowners insurance, but it’s a good idea to have it even if you own your home free and clear. Unless you can cover the costs of rebuilding your home out and replacing your possessions out of pocket, homeowners insurance is a must. Just make sure your policy includes fire coverage.

There are different fire insurance policies that have been designed to suit different interests. To determine which policy you need, there are a number of factors that are considered.

These factors include:

  • The type of risk involved.
  • The nature of the property to be insured.
  • The contents of the property.
  • Occupancy hazards.
  • Exposure hazards.
  • The time element.

Fire Insurance And its Types:

  1. Valued Policy:

At the time of purchasing the policy, the value of the subject matter is decided. In case the subject matter is destroyed or damaged in the fire, the insurer will have to pay a predetermined amount. The indemnity principle will not be applicable to the policy. The predetermined value can be either more or less than the market value at the time of loss. The goods or property whose value cannot be determined after damage are generally the reason this policy is issued. These valuable goods can include works of art, paintings, jewelry, etc.

  1. Specific Policy:

With this policy, the risk is insured for a specific sum. The insurer will pay the loss in case of loss of property. However, the insurer will only be required to pay the loss if it is less than the specified amount. For example, an insurance policy is purchased for $100 and the value of the property is $200. If the loss of property is worth $90, the insured will get the entire $90 of loss. However, if the loss is up to $100, it will typically be paid in full. And in case the loss exceeds the $100, the indemnity will only be upto the amount the policy was taken for i.e. $100. So essentially, with this policy, the insured will not be punished for getting a policy for a lesser sum nor is the actual value of the property taken into consideration.

  1. Average Policy:

If there is an ‘average clause’ that is applicable to the policy, it will be called Average Policy. Average clause is generally added to basically punish the insured for taking up a policy for a lesser sum than the value of the property is. In cases where the value of the policy is less than the value of the property, the compensation payable is proportionately reduced.

For example, if a person takes up a fire insurance policy of $50 and the value of the property is $70. If there is a loss of property worth $90, the underwriter pays compensation of $20. It is essentially to discourage the insured from getting an under-valued policy.

  1. Floating Policy:

This kind of policy is usually taken up to protect goods lying at different places. It should be noted that for this policy, the goods in question should all belong to the same person and one policy should cover all of these goods instead of a different policy for different goods.

A floating policy is useful to businessmen who import and export goods and have these lying in warehouses at different places. The average premium that would have been paid if you had different policies for different goods is charges. Average clause also applies to floating policies.

  1. Comprehensive Policy:

This policy is taken to cover all types of risks. These risks include the risk of a fire, explosion, burglary, riots, lightening, labour disturbances, etc. This comprehensive policy is also known as an all risk policy.

  1. Consequential Loss Policy:

In case a fire dislocates work in the factory due to which production goes down while the fixed expenses remain at the same rate, this policy can be taken to cover up consequential loss or loss of profits. The loss of profits will be calculated on the basis of loss of sales. However, if you want standing charges taken care of as well, you would have to take a separate policy.

  1. Replacement Policy:

If you need compensation on the basis of the market price of the property, this underwriting replacement policy will be the best bet for you. The amount of compensation is calculated after considering the amount of depreciation. According to the replacement policy, compensation will be as per the replacement price so the new asset you are getting is similar to the one which was lost or destroyed. The amount of compensation would be according to the market price of the new assets so that the insured does not have to pay any additional costs and can replace it easily.

What is the bottom line?

So now that you know how fire insurance works and what types of fire insurance policies are available for different types of coverage, you can make an informed decision about whether or not you need fire insurance and if you do, what type of coverage you need.

Before you buy a policy, it would be best if you speak to an insurance agent or broker near you who could guide you about the risk of fire at your property and how valuable your property is so you can determine the value of the policy before stepping out into the market to purchase it.

Tony Bennett

Tony Bennett

Tony Benett makes his living in the insurance industry by teaching and consulting. He is also recognized by the legal profession as an expert on insurance coverages. His insurance experience includes having worked at the company level, owned an independent general agency and having worked for an insurance association. He has received various certificates over the past few years and helps his clients and readers by giving them a realistic outlook on what they can expect to achieve within their set targets. At Insurance Noon, he is known for his in-depth analysis and attention to details with accuracy. He has been published as one of the most referred agents by his peers in the insurance community. Tony loves the outdoors and most sport events. His passion other than providing excellent advice is playing golf.

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