Know Your Fire Insurance

By Basil B. Occeno

IN the Philippines, standard fire insurance includes insurance against loss caused by fire and lightning. Extension of the coverage may be done to include losses against earthquakes, tornadoes, windstorm, and other allied risks.

Fire is classified as friendly or hostile. Friendly fire is that fire that is deliberate and remains within the limits intended for it. Hostile fire is fire that goes out of control and beyond the limits intended for it.

To be covered by fire insurance, the following must be present: Fire is the proximate cause, fire is hostile, accidental in origin, flame or ignition of sustaining velocity.

The law considers losses such as falling walls, damage due to firefighters, effort to extinguish the fire, damage or loss of property being removed from a building, damaged to property due to weather exposure during and after the fire, smoke and heat.

Note that if an item is stolen while still inside a burning property, the insurance company is not liable for the item stolen. This is because the peril is theft, which is not covered under the standard fire insurance policy. But, if the item is removed from the burning building, then stolen, the loss will be recovered.

Loss may also be brought about lightning. Lightning is a discharge of atmospheric electricity. For loss to be covered by the insurance policy, the item damage by lightning must also burn as a result of lightning.

For example, lightning strikes the home antennae, the surge of electricity suddenly causes the TV to stop working. However there is no fire as a result. The TV loss is not covered. But if lightning strikes and the TV burst into flames, the TV loss is covered.
Fire insurance, however, is in itself considered a well-known moral hazard.

For example, fire insurance increases the incentive to commit arson, especially if someone is operating a failing business and decided that they would rather have the cash from the insurance proceeds on the buildings than the buildings themselves. (The value of a business often is based on profitability; after arson, the owner can claim the business was profitable.)

In worst case scenario (from the insurer’s viewpoint), the buildings are over insured if valuable contents are removed but claims are filed that they were destroyed in the fire.

More generally, having insurance discourages preventive measures, such as proper fire prevention.

The problem of moral hazards for insurance can not be eliminated, but can be minimized. For example:
Getting detailed information to evaluate the value of what is being insured, rather than simply taking the word of the person buying the insurance.

Requiring that there be a deductible (an initial up-front sum which the insured must pay out of his or her own pocket in case of a loss (say 80 or 90 percent).

Imposing conditions such as the ownership of fire extinguisher (in the case of fire insurance), or offering price reductions (for example, if a burglar alarm is installed in a home).

Courtesy of Oriental Assurance Corporation, one of the insurers of the various non-life products offered by Mace Insurance Agency, Inc. (A subsidiary of Knights of Columbus Fraternal). For inquires on fire insurance, please call 527-2222, 527-2256 , 527-2223 loc. 301, CP 0917-8286007/0905-2657253 or email

Father of Knights of Columbus in the Philippines


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