Fire insurance covers a policyholder against fire loss or damage from a number of sources. Sources include fires brought about by electricity, such as faulty wiring and explosion of gas, as well as those caused by lightning and natural disasters. Bursting and overflowing of a water tank or pipes may also be covered by the policy.

Most policies provide coverage regardless of whether the fire originates from inside or outside of the home. The limit of coverage depends on the cause of the fire. The policy will reimburse the policyholder on either a replacement-cost basis or an actual cash value (ACV) basis for damages.

If the home is considered a total loss, the insurance company might reimburse the owner for the house's current market value. Typically the insurance will provide a market value compensation for lost possessions, with the total payout capped based on the home's overall value.