Fire Insurance

I

Introduction

Fire Insurance, insurance obtained by owners of homes and commercial properties to provide reimbursement in case of losses resulting from fire. Such insurance is supplied in exchange for the payment of a premium. The five types of insurers who write policies are stock companies, mutual companies, reciprocal exchanges, Lloyd's organizations, and advance premium cooperatives (see Insurance). Most of the fire insurance in the U.S. is underwritten by stock companies. Some business firms, however, are self-insurers; that is, they set aside funds to be used exclusively for indemnifying losses resulting from fire.

II

History

The first scientific system of obtaining funds to compensate for fire loss was developed after the Great Fire of London in 1666, which devastated some 13,000 buildings. In the system inaugurated the following year by the London merchant Nicholas Barbon, small sums of money were collected from many individuals, and a fund was established for compensation of the losses sustained by the few whose property subsequently was destroyed by fire. The first effective fire-insurance company established in the United States was the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, which is still in operation. It was organized in 1752 by Benjamin Franklin. The use of fire insurance became widespread during the 19th and 20th centuries.

The standard fire-insurance policy in the U.S. was adopted in New York State in 1943. It became the prototype of such policies in most other states either through statute or through regulation by state insurance departments. The resulting standardization has helped reduce litigation on disputed claims by making the insurance coverage more understandable to the policyholder and by simplifying adjustment of losses.

III

Insurance Policies

The basic fire-insurance policy covers losses resulting directly from damage or destruction by fire or lightning. In the early 1900s, insurance companies in the U.S. first offered, for an additional premium, to extend the coverage of fire-insurance policies to other perils by the use of an endorsement on the policy. By the late 1920s these additional perils were incorporated into a so-called extended-coverage endorsement. Extended coverage at present includes the perils of damage by windstorm, hail, explosion, riot, strikes, civil commotion, aircraft, vehicles, and smoke. The endorsement may also be extended further.

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In fire insurance the premium rates are of two kinds: class rates and schedule rates. Dwellings are largely class rated; that is, they are grouped into fairly homogeneous categories according to the type of occupancy, type of construction, and type of community fire protection. A uniform rate is applied to all risks in the same category. Commercial and industrial properties, which vary greatly in respect to degree of hazard, are usually schedule rated. In schedule rating the individual physical characteristics of each risk are appraised according to a schedule of charges and credits. The elements considered in the rating include occupancy, construction, internal protection, community fire protection, and exposure from neighboring buildings.

The frequently used homeowners package policy combines fire, extended coverage and other perils, theft, and comprehensive personal liability into one policy. This results in a savings to the policyholder and eliminates overlapping coverages. Similar package policies are available for commercial use.

In recent years many owners of residential and business properties in congested inner-city areas have been unable to obtain adequate insurance coverage for fire, vandalism, burglary, and theft. The Federal Housing and Urban Development Act of 1968 encouraged insurance companies and state regulatory authorities, through a federal program of reinsurance, to set up Fair Access to Insurance Requirements plans, through which residents of low-income areas may obtain the insurance they need. If damage is caused by riot or civil commotion, the federal government will reimburse the insurance company for its losses.

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