INTRODUCTION – What is First-Fire Insurance
More than 80% of global trade is carried out by sea transport with the advantages provided in terms of the amount and variety of products that can be transported, transport cost, transport network and less environmental impact. In order to compensate for possible damages that may occur during maritime transportation very high premium payments can be encountered in the insurance policies. In this article, we will discuss first-fire insurance, which can be a balance point between the cost of insurance and the expected benefit from insurance, and which is frequently used in practice.
"FIRST-FIRE INSURANCE" AS A SPECIAL TYPE OF COVERAGE
The first-fire insurance is the common name for fire insurance of the insurance type called first-loss insurance or the first risk insurance by scholars and practitioners. It is a type of under-insurance regulated in Article 1462 of the Turkish Commercial Code numbered 6102 ("TCC"). The general rule in loss insurance suggests that the amount of the insured interest, which is the insurance value, and the maximum amount of compensation that the insurer can pay, which is the insurance amount, are equal to each other. However, this equality may be changed due to the desire to save on insurance premiums, the expectation that the value of insured interest will decrease, or the insurer's avoidance of full insurance due to the desire to reduce the subjective risk, or the insurance does not have inflation protection. Thus the parties engage in under-insurance. Under the provision of Article 1462 of the TCC, in case of under-insurance, the insurance compensation to be paid by the insurer will be low to the extent that the value of the insured item is understated. However, since Article 1462 of the TCC is not a mandatory provision, and it is regulated that the parties may decide otherwise and that the risk price be paid in full, without applying for an exemption despite the under-insurance. This situation, which is created mutually by the parties despite under-insurance, is called "first-fire insurance". In the first-fire insurance, the insurer will pay in full, without applying the proportionality rule under Article 1462 of the TCC, but on the condition that it is limited to the insurance amount in any case.
It is possible to characterize first-fire insurance as absolute or conditional, and the difference between these two types is whether the non-application of proportionality is subject to a condition. In the case of absolute first-fire insurance, the insurer will, in any case, compensate for the damage, but limited to the insurance cost. In this type of first-fire insurance, the insurance amount is not made over the full value of the insured interest but is determined by the amount of damage foreseen to occur. The insured will bear any loss exceeding the insured amount.
In conditional first-fire insurance, the proportionality rule stipulated in Article 1462 of the TCC is not abolished in absolute terms but rather made conditional. These conditions may be that the amount of damage that will occur in the event of the realization of the risk does not exceed a certain amount or that the difference between the insurance value and the insurance value is not higher than a certain ratio. In conditional first-fire insurance, the loss below the determined condition limit will be compensated by the insurer without applying the proportionality rule. If the loss incurred exceeds this specified limit, the insurer will compensate the insured for the loss proportionally.
In conditional first-fire insurance, unlike absolute first-fire insurance, the insured interest is insured over the full value. However, in the case of partial losses, the amount of which will be determined by the parties, it is aimed to compensate the entire loss without applying the proportionality rule. This amount of damage, which is estimated to occur, is determined as the "first-fire compensation limit" in the policy.
CONCLUSION
Insurances to be made for the compensation of damages that may arise from fire, which is one of the important risks of maritime transport, may cause a serious insurance premium burden to the policy owner due to the high value of the insured cargo or the ship, or the parties may agree that some of the risks remain with the insurant. The parties can secure their interests worth protecting under first-fire insurance, a special type of under-insurance. In the case of first-fire insurance, the parties can eliminate the proportionality rule stipulated in the TCC for under-insurance through mutual agreement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
