Fire Insurance: Definition, Elements, How It Works, and Example

Fire insurance is a type of property insurance that protects against damage and losses caused by fire. Most policies include some type of fire protection, however homeowners may be able to obtain additional coverage in the event that their property is lost or damaged due to a fire.

Purchasing supplementary fire coverage helps to cover the cost of replacement, repair, or reconstruction of property that exceeds the maximum set by the property insurance policy. Fire insurance contracts generally include general exclusions for war, nuclear threats, and other related perils. Damage produced by a planned fire is often not covered.

How Fire Insurance Works

A normal homeowners insurance policy typically includes fire insurance. Homeowners insurance protects policyholders from loss and/or damage to their houses and possessions, often known as insured property. Insured property comprises both the interior and exterior of the residence, as well as any valuables stored on the premises.

Policies may also cover injuries sustained while on the property. If you have a mortgage, your lender is likely to require homeowners insurance before approving your loan. Even if it is not required, a homeowners insurance coverage can provide valuable protection.

You can also get fire insurance as a standalone policy. It protects the policyholder against fire loss or damage from a variety of causes. This covers fires produced by electricity, such as faulty wiring and gas explosions, as well as lightning strikes and natural disasters. A ruptured and overflowing water tank or pipelines may also be covered under the policy.

Example of Fire Insurance

Most policies cover fires that start either inside or outside the home. The amount of coverage depends on the cause of the fire. The coverage reimburses the policyholder for damages on a replacement-cost or actual cash value (ACV) basis.

If the home is declared a total loss, the insurance company may reimburse the current market value. The insurance normally pays market value compensation for lost possessions, with the total payout limited by the home's overall value.

For example, if a property is insured for $350,000, the contents are typically covered for at least 50% to 70% of the insurance value—or $175,000 to $245,000. Many plans limit the amount of compensation for expensive purchases including paintings, jewelry, gold, and fur coats.

Special Considerations

Every year, a policyholder should assess the value of their house to determine whether or not their coverage amount should be increased. Keep in mind that you cannot obtain insurance for more than a home's true value. Insurance firms may provide stand-alone plans for rare, valuable, and irreplaceable things that are not protected under ordinary fire insurance.

Many conventional homeowners insurance policies cover fire damage, including repair costs and other expenses such as relocation.

In some circumstances, you may want more comprehensive coverage. If an insurance policy excludes coverage for fire damage, a homeowner may need to obtain additional fire insurance, especially if the property contains expensive things that are not covered by normal coverage. The insurance company's responsibility is limited by the policy value rather than the amount of damage or loss suffered by the property owner.

Fire insurance policies reimburse for the loss of use of property due to a fire. They also frequently pay additional living expenses in the event that the fire rendered the area unusable. Finally, they address damage to personal property and surrounding structures. Homeowners should document their property and its contents to aid in the appraisal of objects damaged or lost in the event of a fire.

A fire insurance policy provides supplementary coverage against smoke or water damage caused by a fire and is typically valid for one year. Fire insurance policies on the approach of expiration are typically renewed by the homeowner under the same terms as the original policy.

The Bottom Line

For many homeowners, the protection offered by a conventional homeowners insurance policy will be sufficient to cover fire-related losses, such as damage to the home structure or personal belongings. Consult a financial counselor to determine whether a stand-alone fire insurance coverage is appropriate for your needs.