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INSURANCE CLAIMS

Loss of Stock

Calculation of claim if the policy has average clause

Amount of claim = Amount of policy * Net loss / Actual loss of stock (or Closing Stock)

Net Loss = Actual loss of stock (or Closing Stock) – Salvage value

Note: If there is firefighting expenses which allowed as per policy then add those expenses to the
above amount to arrive at amount of claim.

Problem:

1. A fire damaged the premises of a trader resulting in loss of stock of Rs 110000. The goods salvaged
from fire was Rs 40000. The policy was for Rs 50000 eligible for average clause. Decide the
quantum of claim to be lodged with the insurance company.
2. The godown of K Ltd was destroyed by fire on 31.5.2019. The stock was covered by fire policy
for Rs 200000 subject to average clause. The records of the company revealed the following
particulars. Average value of stock on 31.5.2019 Rs 400000; The value of salvaged stock Rs
90000. You are required to ascertain the amount of claim to be lodged with the insurance company.

Calculation of claim (without abnormal stock)

Step 1: Prepare last year trading account and find out rate of Gross profit.
Step 2: Prepare memorandum trading account from the beginning date of current year to the date
of fire. Apply the GP rate to current year sales to find GP, the balancing figure will the closing
stock on date of fire.
Step 3: In the course of preparing trading account / memorandum trading account, following
adjustments to be made
Adjustment Treatment

Personal drawings of goods Reduce from purchases

Goods distributed as samples for Reduce from purchases

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Goods sent or sale or return basis For unsold goods reduce sale value from Sale; and show the
cost value as goods with dealer on the credit side of trading
account

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Goods sent on consignment (still For unsold goods reduce sale value from Sale; and show the
unsold with the consignee) cost value as goods with consignee on the credit side of
trading account

Problem:

3. Ram trader’s godown caught fire on 29.08.2019, and a large part of the stock of goods was
destroyed. However, goods costing Rs 54000 could be salvaged incurring fire fighting expenses
amounting to Rs 2350. The trader provides you the following additional information.

Particulars Rs.

Cost of Stock on 1.4.2018 355250

Cost of Stock on 31.3.2019 395050

Purchases during the year ended 31.3.2019 2839800

Purchases from 1.4.2019 to date of fire 1655350

Cost of goods distributed as samples for advertising from 1.4.2019 to date of fire 20500

Cost of goods withdrawn by trader for personal use from 1.4.2019 to date of fire 1000

Sales for the year ended 31.3.2019 4000000

Sales from 1.4.2019 to date of fire 2268000

The insurance company also admitted fire fighting expenses. The trader had taken the fire
insurance policy for Rs 450000 with an average clause. Calculate the amount of the claim that will
be admitted by the insurance company.

Calculation of claim (with abnormal stock)

1. While calculating rate of Gross Profit eliminate abnormal stock from opening stock, purchases,
sales, closing stock wherever it may be.

2. Similarly in memorandum trading account also eliminate abnormal stock from the above items.

3. Apply GP rate only on sale for normal items and find closing stock for normal items.

4. Trading account and Memorandum trading account to have only normal items.

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5. Deal abnormal item separately in a working note and find the closing stock of abnormal item.

6. Total stock on date of fire = Closing stock of normal items (from Memorandum trading account)
+ Closing stock of abnormal items (from Working note)

7. Other adjustments and workings as mentioned previously.

Problem:

4. On 15th December 2018 the premises of N Ltd were destroyed by fire, but sufficient records were
saved from which the following particulars were ascertained.

Particulars Rs

Stock at cost on 1.4.2017 220500

Stock at cost on 31.3.2018 238800

Purchases yr ended 31.3.2018 1194000

Sales yr ended 31.3.2018 1461000

Purchases 1.4.2018 to 15.12.2018 1015000

Sales 1.4.2018 to 15.12.2018 1162000

In valuing stock as at 31.3.2018 Rs 6900 had been written off for certain stock which was a poor
selling line having cost Rs 20700. A portion of these goods were sold in June 2018 at loss on Rs
750 on the original cost of Rs 10350. The remainder of this stock was now estimated to be worth
60% of the original cost. Subject to the above exception, gross profit had remained at a uniform
rate throughout. The stock salvaged was Rs 17500. The stock was insured for Rs 250000.Calcluate
the amount of claim to be lodged with the insurance company for loss of stock.

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Claim for Loss of Profits

Insurance Claim = Total Consequential Loss * (Insured Amount / Insurable Amount)

Total Consequential Loss

Particulars Amount

Loss on Profit on Short Sales (WN 1) Xxx

Add: Additional Expenses allowed (WN 2) Xxx

Less: Savings in Insured Charges (xxx)

Total Consequential Loss XXX

Work Note 1: Loss on Profit on Short Sales

Loss on Profit on Short Sales = Short Sales * Agreed GP rate

Calculation of Short Sales

Particulars Amount

Sales during the same period in last year (corresponding to this yr disruption period) XXX

Add: Increase stipulated (or) Less: Decrease stipulated XXX

Adjusted Sales XXX

Less: Actual sales during the disruption period (XXX)

Amount of Short Sales XXX

Calculation of Agreed GP rate

GP rate for preceding accounting year + Increase agreed for current year (or)- decrease for cy

GP for preceding accounting year= (Net Profit+Insured Standing charges)/Sales for preceding AY

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Computed of Additional Expenses to be considered

The least of (a); (b); (c) given below will be considered

Particulars Amount

(a)Actual expenses incurred XXX

(b)GP on reduced turnover avoided XXX

(Reduced turnover avoided * Agreed GP rate)

(c)Increase in cost of working * (Net Profit + Insured standing charges)/(Net Profit XXX
+All standing charges)

All standing charges = insured standing charges + uninsured standing charges

Insured Amount- Will be given in the question

Calculation of Insurable Amount

Particulars Amount

Annual Turnover (12 months immediately preceding the date of fire) XXX

Add: Stipulated increase or Less: stipulated decrease XXX

Adjusted Annual Sales XXX

GP on Adjusted Annual sales or Insurable Amount XXX

(Adjusted Annual sales * agreed GP rate)

Note-Claim restricted to loss incurred for disruption during indemnity period. Therefore always
check whether indemnity period > disruption period.

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Problem

5. From the following information calculate a consequential loss claim

Financial year ends on 31st March

Fire occurs on December 1st following

Period of disruption December 1st to 31st March

Period of indemnity 6 months

Net profit for previous financial year Rs 1500000

Insured standing charges Rs 2500000

Uninsured standing charges Rs 400000

Increase in cost of working Rs 320000

Savings in insured standing charges Rs 100000

Reduced turnover avoided through Rs 800000

increased cost of working

Special circumstances clause stipulated Increase in turnover (standard and annual) 20%;
Increase in GP rate: 5%

Turnover for the four months 31st July 30th Nov 31st March

I Year (Rs Lakhs) 40 90 70

II Year (Rs Lakhs) 60 110 20

Sum insured Rs 5000000

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Calculation of Amount of Policy to be taken for the current year

Particulars Amount

GP for Last accounting year XXX

Add: Stipulated increase for current year XXX

Less: Stipulated decrease for current year (XXX)

Add: Increase in insured standing charges for current year XXX

Less: Decrease in insured standing charges for current year (XXX)

Policy to be taken for current year XXX

To find out GP for last accounting year, either prepare Trading account or
GP = Net Profit + All insured standing charges – Other income

Problem
6. CCL wants to take up a loss of profit policy. Turnover during the current year is expected to
increase by 20%. The company will avail overdraft facilities from its bank @ 15% interest to boost
up the sales. The average daily overdraft balance will be around Rs. 3 lakhs. All other fixed
expenses will remain the same. The following further details are also available from the previous
year’s account. Total variable expenses Rs. 2400000. Total fixed expenses Rs. 500000 (Salaries
Rs. 330000; Rent, rates and taxes Rs. 30000, travelling expenses Rs. 50000, Postage Rs. 60000,
Directors fees Rs. 10000, Audit fees Rs. 20000), Miscellaneous income Rs. 70000, Net profit
Rs. 420000.

Determine the amount of policy to be taken for the current year.

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