Fire Insurance 101

What Homeowners Need to Know Before Disaster Strikes

Fire Insurance 101
December 17, 2013

The National Fire Protection Association reports that there were 370,000 home fires that fire departments responded to in 2011, resulting in almost 14,000 injuries and 2,500 deaths, along with nearly $7 billion in direct damage. These NFPA statistics show that fires occur with sufficient frequency that it is a wise decision to carry fire insurance on virtually any form of property.

Fire insurance is designed to pay a certain amount of money that is based on the total estimated loss that the fire caused, assuming the fire was entirely accidental. Fortunately, standard home and rental insurance includes basic fire protection for the loss of property, though additional fire insurance can provide coverage for hotel stays, personal property, and medical expenses.

Purpose of Fire Insurance

Fire insurance can cover commercial property as well as residential. The primary purpose of fire insurance is to pay for the replacement or the estimated value of the house or building at a minimum, and possibly cover other losses the property owner incurs because of the fire. Each fire insurance policy specifies the amount the policy will pay upon damage to the structure and how that amount is determined. There are exclusions for what a fire insurance policy will and will not cover.

Some insurance policies include payments for medical bills or the loss of life, including pets and personal belongings, as well as structures that are outside the property (like garages or decks), and the potential for damage to the overall landscape. Some policies also include paying for hotels when the inhabitants of the damaged house have to find alternative lodging. All these forms of coverage may be in the standard fire insurance policy, or may be part of an extended form of fire insurance that attaches to a main policy.

Types of Fire Insurance

There are several types of fire insurance policies. There is a floating policy where a person may own several different properties but places them all under one contract and one premium. This type of policy uses what is known as an average clause to determine the total amount of coverage for all of the different properties belonging to the policyholder. Often, a commercial business like a chain of stores may use this type of policy.

Another form of policy is known as a value policy, and it is strictly for the defined amount of payment based on the damage where there is no actual loss calculation. For example, if the Jones family took out a value policy instead of the standard contract for indemnity, they could simply get approval for a $300,000 policy that would pay $300,000 upon a qualifying fire at their property. There would be no investigation as to whether the house was actually worth $300,000 or the damage suffered was $300,000, but rather that it was a qualifying fire.

A comprehensive policy is an all-in-one policy for fire, burglary, any third-party risk and even theft. A policyholder may collect on this policy for losses like the amount of profit lost if there is a business run out of the property during the time that the business was shut due to fire.

An insurance policy may also have what is known as a replacement or reinstatement clause where the insurance company has to replace the damaged property, usually a home, instead of just giving out cash for rebuilding.

The last form of policy is known as a specific policy. In a specific policy, the insurance company pays a set amount that is less than the property’s real value. The actual property value is not factored into creating the indemnity or the payment level for the property owner.

Who Should Get Fire Insurance

Virtually any property owner -- or renter who has belongings to protect -- is a good candidate for fire insurance. With residential fires occurring every 77 seconds, there is a good chance that during anyone's lifetime there will either be a fire in your primary residence, or at least nearby. For this reason, fire insurance is an important form of protection that can help you recover from the unfortunate but potential disaster of a home or business fire.

The first step in making sure you are protected is to check the limits of your current home insurance or rental coverage. If the coverage is sufficient, then additional fire insurance is not needed. If the coverage does not include features such as covering temporary lodging, or medical expenses, then additional fire insurance may be beneficial.

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