Page 53 - The Insurance Times November 2024

CASE STUDY

Fire Incident at Textile Manufacturing

plant

Introduction months, causing considerable losses in revenue and
delays in order fulfillment, with an overall impact on
In industrial operations, especially those involving hazard-
ous or flammable materials, the potential for fire incidents customer relationships and business reputation.
poses a substantial threat. Fire insurance is a crucial ele- The estimated loss amounted to INR 20 crore, with both
ment of risk management in these environments, protect- direct and indirect financial impacts severely affecting the
ing against significant financial losses and operational set- plant’s financial health.
backs. However, insurance alone is insufficient without a Insurance Coverage and Underinsurance
proactive approach to risk management, including routine
assessments, policy reviews, and rigorous safety measures. Analysis

This case study examines a fire incident at a textile manu- Despite having fire insurance in place, the plant’s coverage
facturing plant in Maharashtra, India, highlighting the role fell short of adequately compensating for the total losses.
of fire insurance and analyzing the effects of underinsur- The policy covered basic property, equipment, and a clause
ance. It delves into the root causes of the incident, the for business interruption. However, several coverage gaps
scope of losses, and, most importantly, key risk manage- surfaced due to inadequate asset valuations, out-of-date
ment lessons that could prevent similar situations in the policy terms, and a failure to address rising asset values.
future. Policy Coverage: The fire insurance policy had a limit
Incident Overview of INR 12 crore. This was based on older valuations and
did not fully account for recent expansions and addi-
The fire broke out in the early hours at a textile plant(Actual tions in machinery, inventory, and infrastructure. While
Name not disclosed) known for producing cotton and syn- the insurer covered direct damages to equipment, raw
thetic fabrics. Originating from an electrical short circuit in materials, and some business interruption, the total
the weaving section, the fire quickly spread, fueled by highly reimbursement reached only about 60% of the total
flammable materials like cotton, polyester, and synthetic financial impact.
fabrics stored in close proximity to the electrical units. By
the time employees noticed the smoke, the fire had already Evidence of Underinsurance: The disparity between
engulfed a large portion of the facility. Efforts to control the actual value of assets lost and the policy coverage
the blaze were delayed by the lack of advanced fire sup- limit indicated clear underinsurance. The company had
pression systems, leaving the standard fire extinguishers not reviewed or updated its policy limits for over five
insufficient for the task. years, during which time asset values had increased, and
The fire caused extensive damage across multiple significant investments had been made in machinery.
areas: Causes of Underinsurance: The main reason for un-
Property and Equipment: Large sections of the plant, derinsurance stemmed from a lack of routine policy re-
including critical weaving and dyeing machinery, were views. The company had underestimated the value of
destroyed. assets and omitted recently acquired machinery from
the policy. Additionally, the company did not account
Inventory Loss: Raw materials (cotton and synthetic for inflation and replacement costs, resulting in an
fibers) and finished products were burned beyond re- underinsured position when the incident occurred. The
covery.
lack of alignment between asset values and insurance
Structural Damage: Significant parts of the storage and coverage led to a gap that required the company to
production facilities required complete reconstruction. bear substantial out-of-pocket expenses for recovery
Business Interruption: Production ceased for over six and rebuilding.

The Insurance Times November 2024 47