DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM, A.P., INDIA

INTERPRETATION OF REASONABLE
CARE IN FIRE INSURANCE

INSURANCE LAW

Prof. ARPIT JAIN

RACHIT RANJAN, RAHUL DUBEY, KUMAR PRATEEK

ROLL NO: 2014085, 2014087,2014051

XI SEMESTER

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ACKNOWLEDGEMENT

It gives me incredible pleasure to present my project of LAW OF INSURANCE on the topic

of INTERPRETATION OF REASONABLE CARE IN FIRE INSURANCE. I would like
to enlighten my readers regarding this topic and I hope I have tried my best to pave the way
for bringing more luminosity to this topic.

I am grateful to my law of insurance faculty who has given me the idea and encouraged me to
venture this project. I would like to thank librarian of DSNLU for his interest in providing me
a study materials.

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 TABLE OF CONTENTS

S.NO. CONTENT PG. NO.

1 ACKNOWLEDGEMENT 3

2 LIST OF ABBREVIATIONS 4

3 LIST OF CASES 5

4 INTRODUCTION 6

5 HISTORY OF FIRE INSURANCE 6

6 CHARACTERISTICS OF FIRE INSURANCE 8

7 REASONABLE CARE 9

8 INTERPRETATION OF REASONABLE CARE BY 10

INDIAN COURTS

9 CONCLUSION 14

10 BIBLIOGRAPHY 15

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 LIST OF ABBREVIATIONS

Art. Article

Arts. Articles

CIT Commissioner of Income Tax

Etc. Etcetera

Ed. Edition

Id. Ibid

IT Income tax Tribunal

Ltd. Limited

ROC Registrar of Company

SC Supreme Court

SCC Supreme Court Cases

Sec. Section

VAT Value Added Tax

Vol. Volume

www World Wide Web

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 LIST OF CASES:

National Farmers Union Mutual Insurance Society Ltd., v. Dawson………. (1941) LI LR 167

Woolfall & Rimmer Ltd v. Moyle……………………………………………..(1942) 1 KB 66

Carlton v. Park……………………………………………………………………10 LI LR 776

Sofi v. Prudential Assurance……………………………………….. (1993) 2 Lloyd’s Rep 559

Hayward v. Norwich Union Ltd………………………………….. (2001) Lloyd’s Rep IR 410

Union of India (UOI) and Anr Vs. United India Insurance Co. Ltd………..1992 BOMLR 357

Union of India Vs. The United India Fire and General Insurance Co. Ltd. and Anr
….. 1982 ACJ 156

Sheriff vs. British Park Insurance Co. Ltd…………………………...….(1934) (36) NLR (97)

Hindustan Corporation (Hyd) Pvt. Ltd. Vs. M/s. United India Fire and General Insurance Co.

Ltd.,………………………………………………………………………… AIR 2007 AP 347

Cochin Port Trust vs. Associated Cotton Traders…………………………..AIR 1983 Ker 154

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INTRODUCTION:
Fire insurance is a contract under which the insurer in return for a consideration (premium)
agrees to indemnify the insured for the financial loss which the latter may suffer due to
destruction of or damage to property or goods, caused by fire, during a specified period. The
contract specifies the maximum amount, agreed to by the parties at the time of the contract,
which the insured can claim in case of loss. This amount is not, however, the measure of the
loss. The loss can be ascertained only after the fire has occurred. The insurer is liable to make
good the actual amount of loss not exceeding the maximum amount fixed under the policy.
The term “fire” is used in its popular and literal sense and means a fire which has broken
bounds. Fire is used for domestic or manufacturing purposes is not fire as long as it is
confined within usual limits. In the fire insurance policy, “Fire” means the production of
light and heat by combustion or burning. Thus, fire, must result from actual ignition and the
resulting loss must be proximately caused by such ignition. The phrase loss or damage by fire
also includes the loss or damage caused by efforts to extinguish fire.

HISTORY OF FIRE INSURANCE

A fire at a business can devastate a business. The structure may be damaged beyond repair.
Business revenues are disrupted as the business cannot remain open. In the United States in
2006 there were 1.6 million fires reported resulting in $11.3 billion in direct property loss. It
is a risk that must be insured against.

Most property insurance policies and business owner policies cover fire losses. Most business
property insurance policies are broad form policies. These policies list a number of perils that
are covered by the policy and exclude perils that are not covered.

Fire insurance means insurance against any loss caused by fire. Section 2(61) of the
Insurance Act defines fire insurance as follows: “Fire insurance business” means the
business of effecting, otherwise than incidentally to some other class of business, contracts of
insurance against loss by or incidental to fire or other occurrence customarily included among
the risks insured against in fire insurance policies.1

However, fire insurance can be purchased as a specific peril policy or the coverage increased
by a specific endorsement. It is important for the business owner to understand what is not
covered under a traditional broad form policy and ways to increase coverage. It is important

1
§2(61), Insurance Act

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to review what appropriate considerations when reducing premiums are and what not
effective ways to save premiums are.

CHARACTERISTICS OF FIRE INSURANCE

1. Fire insurance is a contract of indemnity. The insurer is liable only to the extent of the
actual loss suffered. If there is no loss there is no liability even if there is a fire.
2. Fire insurance is a contract of good faith. The policy-holder and the insurer must
disclose all the material facts known to them.
3. Fire insurance policy is usually made for one year only. The policy can be renewed
according to the terms of the policy.
4. The contract of insurance is embodied in a policy called the fire policy. Such policies
usually cover specific properties for a specified period.
5. Insurable Interest: A fire policy is valid only if the policy-holder has an insurable
interest in the property covered. Such interest must exist at the time when the loss
occurs. In English cases it has been held that the following persons have insurable
interest for the purposes of fire insurance- owner; tenants, bailees, including carriers;
mortgages and charge-holders.
6. In case of several policies for the same property, each insurer is entitled to contribution
from the others. After a loss occurs and payment is made, the insurer is subrogated to
the rights and interests of the policy-holder. An insurer can reinsure a part of the risk.
7. Fire policies cover losses caused proximately by fire. The term loss by fire is interpreted
liberally. Example: A women hid her jewellery under the coal in her fireplace. Later on
she forgot about the jewellery and lit the fire. The jewellery was damaged. Held, she
could recover under the fire policy.
8. Nothing can be recovered under a fire policy if the fire is caused by a deliberate act of
policy-holder. In such cases the policy-holder is liable to criminal prosecution.
9. Fire policies generally contain a condition that the insurer will not be liable if the fire is
caused by riot, civil disturbances, war and explosions. In the absence of any specific
expectation the insurer is liable for all losses caused by fire, whatever may be the causes
of the fire.
10. Assignment: According to English law a policy of fire insurance can be assigned only
with the consent of the insurer. In India such consent is not necessary and the policy can
be assigned as a chose-in-action under the Transfer of Property Act. The insurer is

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 bound when notice is given to him. But the assignee cannot be recovering damages
unless he has an insurable interest in the property at the time when the loss occurs. A
stranger cannot sue on a fire policy.
11. Payment of Claims: Fire policies generally contain a clause providing that upon the
occurrence of fire the insurer shall be immediately notified so that the insurer can take
steps to salvage the remainder of the property and can also determine the extent of the
loss. Insurance companies keep experts on their staff of value the loss. If in a policy
there is an international over valuation of the property by the policy-holder, the policy
may be avoided on the ground of fraud.

REASONABLE CARE:

Reasonable care clauses have in recent years become standard in most forms of insurance,
and require the assured to take all reasonable care or steps to avoid a loss under the policy.
The causes originated in liability insurance, but it was rapidly held by the courts, after an
uncertain start,2 that the obligation to take reasonable care could not be equated to an
obligation to avoid negligence, as such a construction would prevent the assured from
recovering under the policy in the vast majority of cases in which his negligence was the case
of liability to the third party.3 The same approach was ultimately adopted for first party
policies,4 even though there is far less justification for it as a first party loss cane be the result
of the matters beyond the control of the assured as well as negligence. However, in the root
case, the decision of the court of appeal in Sofi v. Prudential Assurance,5 the narrow
approach to the interpretation of reasonable care clauses in the first party policies was
confirmed. In this case, which was a claim under a “hearth and home policy”, various items
of jewelry were stolen from the locked glove compartment of the assured’s car which was at
the time parked in a car park at Dover Castle. The insurers asserted that there had been a
breach of the assured’s obligation to take “all reasonable steps to safeguard the property
insured”. The assured’s evidence was that he regarded the risk as minimal. The court of
appeal held that the threshold test for the breach of the clause was recklessness, which
involved a deliberate disregard of the safety of the property, and while the assured might have
been negligent by reaching a wrong decision on safety, it could not be said that he had been
reckless. The decision was applied in Glenmuir Ltd., v. Norwich Union Fire Insurance
2
National Farmers Union Mutual Insurance Society Ltd., v. Dawson (1941) LI LR 167
3
Woolfall & Rimmer Ltd v. Moyle (1942) 1 KB 66
4
Carlton v. Park 10 LI LR 776
5
(1993) 2 Lloyd’s Rep 559

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Society Ltd., in which the assured was induced by fraud to take his vintage car to Belgium
where it was stolen in the course of what purported to be a test drive by a prospective
purchaser, the court’s view was that the assured had been negligent but not reckless, and that
it was not enough for the court to be satisfied that a reasonable person might have acted
differently as the test for breach of the clause related to the subjective state of the assured’s
mind in his assessment of the risk. Similarly, in Hayward v. Norwich Union Ltd.,6 the facts
of which were given, the court held that an assured who left his keys in the ignition of his car
while he paid for petrol had not been reckless as he believed that the immobilizer and security
system fitted to the car would be sufficient to prevent its theft. There was no appeal against
this aspect of the decision.7 A case falling on the other side of the line is Devco Holder v.
Legal and General Insurance Society,8 in which the assured was held to be unable to recover
for the loss of a Ferrari which had been stolen while parked unattended in a car park for some
hours with the key in the ignition, the court of appeal held that the assured had acted with
deliberate disregard for the safety of his vehicle and had thus reckless.

INTERPRETATION OF REASONABLE CARE BY INDIAN COURTS:

In Union of India (UOI) and Anr Vs. United India Insurance Co. Ltd.,9 the Trial Court held
that negligence of Railway Administration quantum of damages as claimed was proved and
suit by Insurance Company without jointing consignee or consignor was maintainable.
Hence, the Appeal is filed in the Bombay High Court.

Issue: Whether, consignor person which had taken policy of insurance could make valid
assignment of right to sue Railway in favour of Plaintiff?

Held: It was held that assignee of policy in whom property in goods insured
against fire vests, gets all rights of suit as if he had made contract of insurance. Therefore,
Section 73 of Railways Act provides immunity to Railway Administration in respect of
damages arising out of causes stated therein and fire was one of such causes. However,
proviso leaves no doubt that it was for railway to show and prove that damage took place in
spite of reasonable care. Indeed, this was case where adverse inference could be drawn
against Railway for non-production of certain evidence, documentary as well as oral. Joint
survey was made by authorised Surveyor, Railway Administration had proved report, Exh.

6
(2001) Lloyd’s Rep IR 410
7
(2000) Llyod’s Rep IR 382
8
(1993) 2 Llyod’s Rep 567
9
2(1993) ACC 345, 1992 BOMLR 357

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43, which was signed in his presence. Hence, there was no justification, to reject report either
on merits or on ground that surveyor was not examined. Thus, Trial Court was correct in
determining quantum of damages. Appeal dismissed.

In Union of India Vs. The United India Fire and General Insurance Co. Ltd. and Anr.,10

There were two plaintiffs in the suit, the first being the Insurance Company and the second
being a company by name Algappa Textiles (Cochin) Ltd. The admitted facts are that the 50
Bales of fully pressed cotton were despatched on 21-1-1971 for delivery to the second
plaintiff in the suit at Pudukad railway station between Cochin and Shoranur. The goods
arrived at the Pudukad railway station on 12-2-1971. The goods were unloaded with the help
of coolies engaged by the second plaintiff itself on 13-2-1971. After the goods were
unloaded, they were kept adjacent to the goods shed as there was no space in the covered
goods shed for stacking these 50 bales. At about 3: 45 p. m. fire was noticed in these 50 bales
and the Station Master on duty as well as the railway staff and others attempted to put out
the fire and fire brigades also were summoned and the first Brigade arrived and the second
Brigade arrived. After the fire, the goods were assessed and according to the plaintiffs, the
salvage value of the goods was only Rs. 15,000. They instituted the present suit for recovery
of a sum of Rs. 65,53,170 with interest at the rate of 6 percent per annum from the date of
presentation of the plaint till date of payment. It was stated that the second plaintiff came to
know that on 28-2-1971 there was a fire accident at Pudukad railway station and the entire 50
bales of cotton belonging to the second plaintiff were destroyed by fire, in the custody of the
defendant; the second plaintiff immediately deputed a surveyor to assess the damage as well
as to know the cause of the fire accident, all the bales of cotton were totally unfit for the
Purpose for which they were bought by the second Plaintiff they managed to sell the salvage
for Rs. 15.000, being the best price available for the same. The loss occurred entirely due to
the negligence and/or misconduct of the servants of the defendant who failed to
exercise reasonable care as is expected of it in law, safeguarding the consignment against
any fire accident, and in having the reasonably required equipments to extinguish the fire. In
paragraph 6 of the plaint, it was averred that the total loss suffered by the second plaintiff was
Its. 78,658-54 being the value of the 50 bales of the cotton Plus Rs. 15000 being the
survivor's fees 'and giving credit to Rs. 15,000 being salvage value, they have suffered a net
loss of Rs. 65-531-70 and only with reference to this amount. They instituted the suit.

10
1982 ACJ 156

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It was held it is the bounden duty of the defendant to produce reliable and unassailable
evidence that they have taken as much care of the goods bailed to them as a man of ordinary
prudence would under similar circumstances take of his own moods of the same bulk quality
and value and in my opinion the principles of res ipsa loquitur and the Presumption under
Section 114(g) of the Evidence Act, the absence of the porter's evidence may be applied to
the facts of this case from the foregoing discussion, the defendant cannot be said to have
discharged its onus of proving that it has exercised all possible reasonable care and caution
which a prudent man would do if the goods were his own and thus it has to be taken that the
steps taken by the defendant to secure the goods against loss damages were mostly
inadequate.

In Sheriff vs. British Park Insurance Co. Ltd.,11 the plaintiff-respondent had obtained on a
hire-purchase agreement from the United Motor Finance Company a Pontiac car to be used
by him for hiring, at a price of Rs. 4,320, on the terms that he was to pay for it by twelve
instalments of Rs. 247.50 per month. It was in fact the ordinary hire-purchase contract and
the car itself was to remain by the terms of the agreement the property of the company until
the last instalment was paid. At the time of the execution of the hire-purchase agreement the
car was insured with the defendants-appellant by the plaintiff-respondent and by the United
Motor Finance Company from whom he was purchasing the car for Rs. 4,050, for their
respective rights and interests. One of the risks insured against was loss of the insured vehicle
by fire up to the value of the vehicle at the time of the fire or the value stated in the schedule,
viz., Rs. 4,050, whichever was less. The plaintiff-respondent took possession of the car and
drove it as a hiring car for five months, paying monthly instalments for those five months. At
the end of that time the car was destroyed by fire and after litigation on the matter the
Supreme Court held that the fire was accidental. It is clear therefore that the defendants-
appellant, the insurers, must pay, as they themselves admit, and the only question is, how
much.

Plaintiff brought this action praying for judgment for the sum of Rs. 4,050 the full sum for
which the car was insured. The defendant-company filed an answer denying liability and
praying for a dismissal of the plaintiff's action for the following among other grounds: (a)
The vehicle was being driven in an unsafe or in a damaged condition; (b) Reasonable care in
the protection and use of the said vehicle was not exercised; (c) The plaintiff's agent or

11
(1934) (36) NLR (97)

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servant wrongfully refrained from taking any steps to extinguish the said fire or to lessen the
damage consequent thereof.

It was urged, however, that from the sum of Rs. 1,978.50 which was the aggregate of the
instalments still payable under the hire-purchase agreement, some deduction should be made
when assessing the value of the Motor Finance Company's interest in the car. It was said that
inasmuch as that sum was payable over a period of 8 months and was not due and payable at
the date on which this fire occurred the interest of the Motor Finance Company should not be
valued upon the basis that the whole of the sum was payable at the date of the fire. There is
no evidence before us as to what deduction, if any, the plaintiff would be entitled in the event
of his having elected to pay the full amount of these instalments at once. Nor is it clear that he
was entitled to any deduction at all in the event of his deciding to make immediate payment
instead of availing himself of the right to pay the sum by instalments. Nor indeed is there any
evidence before us as to the sum, if any, which should be deducted from the aggregate of
these instalments in consideration of the immediate payment of all sums payable under the
agreement. It was admitted in the course of the argument that assuming a case had been made
out for such a deduction the amount could hardly exceed Rs. 60 or Rs. 70. But as already
stated the plaintiff has shown no right to claim any such deduction nor has he adduced
evidence to show what the deduction should be even if it be assumed that he had such a right.

The order under appeal must therefore be set aside and judgment will be entered for the
plaintiff for the lesser sum of Rs. 771.50. The defendant is entitled to the costs of this
appeal.

It remains to consider what order should be made in respect of the costs in the Court below.
The plaintiff was compelled to come into Court as the defendant-company disclaimed all
liability and refused any payment whatsoever. Eventually the parties confined the trial to
the single issue whether the plaintiff's interests should be valued at Rs. 771.50 as the
defendant contended or at the larger sum claimed by the plaintiff.

The conclusion arrived at in appeal is that the defendant should have succeeded at the trial
which ultimately took place on September 21, 1932, in his contention that the plaintiff was
not entitled to anything in excess of the sum of Rs. 771.50.

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In Hindustan Corporation (Hyderbad) Pvt. Ltd. Vs. M/s. United India Fire and
General Insurance Co. Ltd., Hyderabad and others12, it was held that the appellant, as
common carrier, cannot contract out or relieve itself of its absolute liability under
Section 8 of the Carriers Act, 1865 by stipulating that the goods were being carried at 'the
owner's risk', and that the burden is clearly upon it to establish that there was no negligence
on its part. No reliable and convincing evidence has been adduced by the appellant to
discharge the burden on it and to establish that it and its servants or agents had taken
all reasonable care in respect of the goods entrusted to it and that there was no negligence on
its part. That the goods were damaged due to shock circuit and that they were delivered in
semi burnt condition. The court observed that the respondent is liable to compensate the
appellant as he has taken all the reasonable care to protect the goods stored in the warehouse.
The appellant could not anticipate the happening of shock circuit which will further lead to
the damage of goods. Hence, the insurance company is liable to enforce the policy and
compensate for the loss incurred to the goods.

In Cochin Port Trust vs. Associated Cotton Traders13 it was held that the insured is bound to
take as much care of the goods as a man of ordinary prudence would, under the similar
circumstances, take of his own goods of the same bulk, quality or value as of the goods lost.
This indicates the standard of diligence required of an insured. The nature or amount of care
required must necessarily vary from case to case. He has a duty to take all reasonable
precautions to obviate risks which may be reasonably apprehended or foreseeable. He has a
duty to take all proper measures for the protection of the goods when such risks are imminent
or had actually occurred.

CONCLUSION:

In Fire Insurance, not only the loss by fire is covered but also the damages caused by water,
accident and other perils included in the policy. But in fire insurance, the insured has the
burden of proof to establish that he has taken reasonable care while the goods were in his
possession. From the above mentioned precedents it can be determined there is no proper
definition for reasonable care. The court from time to time, depending on the facts and
circumstances of the case provided interpretation to the word reasonable care in insurance
case. The interpretation which the majority of judicial officers follows for determining

12
AIR 2007 AP 347
13
AIR 1983 Ker 154

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reasonable care is such care taken by a reasonable man of sound mind to protect the goods
from external damage or to avoid any unfortunate event to be occurred which could damage
the goods. In the absence of reasonable care, the insured cannot claim the compensation from
the insurance company as the insurer’s responsibility is to cover the loss of the insured
incurred which was beyond the anticipation of a reasonable man.

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 BIBLIOGRAPHY:

BOOKS:

SACHIN RASTOGI, INSURANCE LAW AND PRINCIPLES, PAPERBACK, Lexis Nexis,

New Delhi (2014)

Sharma K V S, Mordern insurance law in India, Lexis Nexis, New Delhi (2012)

V. Gaurav, Insurance Laws, Allahabad Law Agency,Lucknow (2016)

Articles:

P. Vardharajan, Fire Insurance and Policy, Vol II, ILI Journal (2011)

Jaiswal Aditya, Changing Trends in Insurance law: An Indian Perspective, Vol VII, IL
Journal (2009)

Websites:

www.manupatra.com

ww.westlaw.co.in

www.heinonline.com

Journals:

Andhra Law Times

Supreme Court Cases

Andhra Law Digest

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