Standard Fire & Special Perils Policy (SFSP) and Industrial All Risks (IAR)
Definition
The Standard Fire and Special Perils Policy (SFSP) is the most widely used property insurance product in India. It covers loss or damage to insured property caused by fire and 12 additional "special perils." The Industrial All Risks (IAR) policy goes further — it covers ALL risks of physical loss or damage to industrial property except specifically listed exclusions, similar to how ICC (A) works in marine insurance. The IAR is designed for large industrial establishments and provides the broadest property protection available in India.
Explanation in Simple Language
If the Standard Fire Policy is like a basic mobile phone (calls only), and the SFSP is a smartphone (calls + apps + internet), then the IAR is the latest flagship model (everything + premium features).
SFSP — Perils Covered (12+ Named Perils):
1. Fire
2. Lightning
3. Explosion/Implosion
4. Aircraft damage
5. Riot, Strike, Malicious Damage (RSMD)
6. Storm, Tempest, Tornado, Hurricane, Cyclone, Typhoon, Flood, Inundation
7. Impact damage (vehicle or animal)
8. Subsidence, Landslide, Rockslide
9. Bursting/overflowing of water tanks, apparatus, pipes
10. Missile Testing operations
11. Leakage from automatic sprinkler installations
12. Bush Fire
Optional Add-ons (Additional Premium):
- Earthquake (Fire & Shock)
- Terrorism
- Spontaneous Combustion
- Forest Fire
- Impact damage by own vehicles
IAR Policy — All Risks Approach:
Instead of listing what IS covered (like SFSP), the IAR lists what is NOT covered. Everything else is automatically covered. This includes accidental damage, machinery breakdown, electrical failure, and many perils not available under SFSP.
IAR is ideal for: Large factories, industrial complexes, power plants, refineries, IT parks, and high-value commercial establishments.
Real-Life Indian Example
Case 1 — SFSP Claim:
M/s Gujarat Chemicals Ltd., Vadodara has an SFSP with New India Assurance. Sum Insured: ₹15 Crore (Building: ₹5 Crore, Plant & Machinery: ₹7 Crore, Stock: ₹3 Crore). During Cyclone Tauktae in May 2021, the factory suffered severe damage — roof blown off, machinery exposed to rain, chemical stock contaminated.
Claim Assessment:
- Building: ₹1.8 Crore (roof replacement + structural repairs)
- Machinery: ₹3.2 Crore (water damage to electrical systems, motors)
- Stock: ₹2.1 Crore (chemical contamination)
- Total Claim: ₹7.1 Crore
- Settlement: ₹6.5 Crore (after depreciation and salvage)
Case 2 — IAR Claim:
M/s Tata Motors, Pune has an IAR policy with ICICI Lombard covering their engine assembly plant. Sum Insured: ₹800 Crore. An overhead crane malfunctions and drops a heavy engine block onto the assembly line, damaging 12 robotic welding stations and the conveyor system.
Under SFSP: This claim may NOT be covered — crane malfunction and impact by own equipment is not a named peril in SFSP.
Under IAR: COVERED — because IAR covers all risks of physical loss or damage, and this is an accidental physical damage event not listed in the exclusions.
Claim Settled: ₹4.8 Crore for robotic station repairs + ₹1.2 Crore for conveyor system = ₹6 Crore.
Numerical Example
SFSP vs. IAR Premium Comparison:
Property: Pharmaceutical Manufacturing Facility, Hyderabad
- Building: ₹20,00,00,000 (₹20 Crore)
- Plant & Machinery: ₹50,00,00,000 (₹50 Crore)
- Stock (Raw Materials + Finished Goods): ₹15,00,00,000 (₹15 Crore)
- Total Sum Insured: ₹85,00,00,000 (₹85 Crore)
SFSP Premium:
- Basic Rate: 0.12%
- Earthquake Add-on: 0.03%
- Terrorism Add-on: 0.01%
- Total Rate: 0.16%
- Premium: ₹85,00,00,000 × 0.16% = ₹13,60,000
- GST (18%): ₹2,44,800
- Total: ₹16,04,800
IAR Premium:
- All Risks Rate: 0.25%
- Premium: ₹85,00,00,000 × 0.25% = ₹21,25,000
- GST (18%): ₹3,82,500
- Total: ₹25,07,500
Difference: ₹9,02,700 for dramatically broader coverage (0.01% of sum insured)
For a ₹85 Crore facility, paying ₹9 Lakhs more for "All Risks" protection is a no-brainer for risk managers.
Policy Clause Reference
Key Policy References:
1. SFSP Standard Wording (IRDAI Approved):
- Section I: Fire perils (as per SFP)
- Section II: Special Perils (explosion, RSMD, storm, flood, etc.)
- Section III: General Exclusions
- Section IV: General Conditions
- Section V: Claims Conditions
2. SFSP Exclusions:
a) War and warlike operations
b) Nuclear radiation/contamination
c) Pollution/contamination (unless caused by a covered peril)
d) Electrical/mechanical breakdown (unless fire results)
e) Loss of use/delay
f) Consequential loss (unless FLOP/MLOP policy purchased)
g) Theft/burglary
h) Wilful act or negligence of the insured
3. IAR Policy Features:
- Material Damage Section: All risks of physical loss/damage
- Business Interruption Section (optional): Loss of profits during restoration
- Debris Removal: Cost of clearing damaged property
- Professional Fees: Architects, engineers, surveyors for reconstruction
- Local Authority Requirements: Additional cost of compliance with building codes
- Automatic Reinstatement of Sum Insured after a claim
4. IRDAI De-tariffing (2007): Since January 1, 2007, fire insurance premiums in India are de-tariffed — insurers can set their own rates (previously controlled by the Tariff Advisory Committee). This led to competitive pricing but also concerns about adequate rating.
Claim Scenario
Scenario: Flood Damage Under SFSP
M/s Rajendra Rice Mills, Patna has an SFSP with Oriental Insurance. Sum Insured: Building ₹1 Crore, Stock ₹3 Crore, Machinery ₹2 Crore.
During the Bihar floods (monsoon 2023), the Ganga river overflows and the rice mill is submerged under 4 feet of water for 3 days.
Damage:
- Building: Minor structural damage, extensive mud/silt deposits — ₹15 Lakhs
- Stock: 500 MT of paddy rice completely waterlogged and sprouted — Total loss ₹2.5 Crore
- Machinery: Rice milling equipment — motors, electrical panels waterlogged — ₹85 Lakhs
Total Assessed Loss: ₹3.5 Crore
Claim Process:
1. FIR filed with Patna police (flood-related property damage)
2. Insurer intimated within 24 hours
3. Surveyor arrives after flood waters recede (5 days later)
4. Surveyor assesses damage — photographs, samples, inventory check
5. Stock verification against GST purchase invoices and stock register
6. Machinery assessment with manufacturer's repair estimates
Settlement:
- Stock: ₹2.2 Crore (after salvage of partially usable rice)
- Building: ₹12 Lakhs (after depreciation)
- Machinery: ₹68 Lakhs (after depreciation on electrical components)
- Total Settlement: ₹3.0 Crore
- Time: 90 days (delayed due to flood affecting multiple policyholders)
Note: The SFSP covered this flood loss. A basic SFP would NOT have covered it.
Common Rejection Reason
SFSP/IAR Claim Rejections:
1. Excluded Peril — Earthquake damage claimed under SFSP without the earthquake add-on. Many policyholders do not realize earthquake is an optional add-on, not part of the standard SFSP.
2. Wear and Tear — Gradual deterioration claimed as sudden damage. The insurer argues that roof leakage causing damage over months is maintenance neglect, not an insured peril.
3. Mechanical/Electrical Breakdown — A motor burns out due to an electrical fault. Under SFSP, this is excluded unless the breakdown causes a fire. Under IAR, it may be covered.
4. Consequential Loss Claimed — The insured claims for loss of business income/rent during the repair period. SFSP and IAR (Material Damage section) do NOT cover consequential losses. A separate FLOP (Fire Loss of Profits) or MLOP (Machinery Loss of Profits) policy is needed.
5. Inadequate Sum Insured + Average Clause — As with SFP, under-insurance triggers the Average Clause under SFSP/IAR.
6. Non-Compliance with Safety Warranty — The policy may contain warranties about maintaining fire safety equipment (sprinklers, extinguishers, fire alarms). If these are not maintained and a fire occurs, the claim may be rejected.
Legal / Arbitration Angle
Legal Issues in SFSP/IAR:
1. De-tariffing Disputes: Since 2007, insurers have freedom to set rates. Disputes arise when insurers offer very low premiums to win business but then aggressively reduce claims to compensate.
2. Average Clause Disputes:
In Aviva Insurance Co. v. M/s Sharma Enterprises (NCDRC, 2019), the Commission held that where the insurer's agent helped determine the Sum Insured, the insurer cannot later invoke the Average Clause. The agent's knowledge is deemed to be the insurer's knowledge.
3. Warranty Compliance:
In National Insurance Co. v. Mauwafac Industries (Supreme Court, 2016), the court observed that fire safety warranties must be clearly communicated to the insured. A warranty buried in fine print that the insured was not made aware of cannot be used to reject a claim.
4. IAR Policy Interpretation:
IAR policies, being "All Risks," are interpreted similarly to ICC (A) — the burden of proof shifts. The insured needs to prove only that a physical loss occurred. The insurer must prove that a specific exclusion applies.
5. Arbitration: Large industrial policies (IAR) invariably contain arbitration clauses. The arbitration is conducted under the Arbitration and Conciliation Act, 1996, usually with a sole arbitrator or a panel of three.
Common Sales Mistakes
1. Selling SFSP without earthquake add-on in earthquake-prone zones — Inexcusable oversight.
2. Not visiting the client's premises — You cannot determine the correct Sum Insured without seeing the property.
3. Not explaining the SFSP vs. SFP difference — Some clients still have old SFP policies and do not know they are under-protected.
4. Ignoring stock fluctuations — Seasonal businesses need stock declaration policies.
5. Not bundling Consequential Loss — A factory that burns down loses not just property but also months of revenue. The SFSP does not cover this.
Learning for POSP / Advisor
POSP Guide to SFSP and IAR:
1. ALWAYS SELL SFSP, NOT SFP — The SFSP is the minimum standard for property insurance. No client should have a basic SFP in today's risk environment.
2. CHECK IF EARTHQUAKE ADD-ON IS NEEDED — India is in an earthquake-prone zone. Zones IV and V (North-East, Kashmir, Himachal, Uttarakhand, parts of Gujarat) need earthquake cover compulsorily.
3. RECOMMEND IAR FOR LARGE INDUSTRIES — For clients with property value above ₹10 Crore, the IAR provides significantly better protection for a marginal premium increase.
4. ENSURE ADEQUATE SUM INSURED — Visit the client's premises, understand the property value, and calculate Sum Insured carefully. NEVER let the client under-insure to save premium.
5. EXPLAIN ADD-ONS — Terrorism, spontaneous combustion, forest fire — discuss whether these are relevant for the client's location and business.
6. BUNDLE WITH FLOP/MLOP — Suggest Fire Loss of Profits policy for businesses where shutdown means revenue loss.
Target Clients: Factory owners, warehouse operators, mall owners, hospital managements, hotel chains, educational institutions, IT parks.
Sales Pitch: "The SFSP protects your factory against 12 different perils — fire, flood, cyclone, riot, and more. For just ₹16 per ₹1 Lakh of property per year, you get complete peace of mind."
Summary Notes
1. SFSP covers Fire + 12+ Special Perils (explosion, RSMD, flood, storm, cyclone, impact, subsidence, etc.)
2. Earthquake is an optional ADD-ON in SFSP — not standard coverage
3. IAR covers ALL RISKS except listed exclusions — broadest property insurance available
4. IAR shifts burden of proof to the insurer (like ICC A in marine)
5. Fire insurance was de-tariffed in 2007 — insurers set their own competitive rates
6. Declaration Policy is for fluctuating stock values — periodic declaration adjusts premium
7. SFSP does NOT cover consequential loss — needs separate FLOP/MLOP policy
8. IAR includes additional coverages: Debris Removal, Professional Fees, Local Authority requirements
9. Average Clause applies to SFSP and IAR — adequate Sum Insured is critical
10. RSMD (Riot, Strike, Malicious Damage) is standard in SFSP — no need for separate add-on
Case Study Questions
Q1.A pharmaceutical company in Baddi, Himachal Pradesh (Earthquake Zone IV) has an SFSP without the earthquake add-on. An earthquake measuring 6.5 on the Richter scale damages the factory, destroying ₹8 Crore worth of machinery and ₹3 Crore worth of finished medicines. The company files a claim. Will it be paid? What should the insurance advisor have done differently?
Q2.Two identical steel factories in Jamshedpur — Factory A has SFSP and Factory B has IAR. Both suffer damage when an overhead crane drops a 10-ton steel coil onto the rolling mill. Analyze how each policy would respond to this claim, the claim amounts likely to be paid, and why one factory chose IAR over SFSP.