Insurance claim

Content:
 Loss of stock by fire
 Loss of profit by fire
 Calculation of sum to be insured

Loss of stock by fire:

Steps for computation of claim for loss of stock by fire:

 Step- 1 : ascertain GP % (i.e. GP %= GP X 100 )

Sales
If GP is not given in Q then prepare trading and P/l a/c
for previous year .
 Step-2: Prepare memorandum trading a/c from the
beginning of the year till the date of fire and ascertain
the cl.stock on the date of fire as bal fig .
 Step-3: calculate gross claim as under:
Stock as on the date of fire xxx
(-) Salvaged stock (i.e. rescued stock ) (xxx)
(+) fire fighting exp ( if any ) xxx
Gross claim xxx

Note: fire fighting exp shall be restricted to lower of

salvaged stock or actual expense
 Step-4: Calculation of net claim :
 o by applying average clause:
Gross claim X policy value
Stock on date of fire

o without applying average clause:

Gross claim or policy value (whichever is lower)
Note: Net claim cannot exceed gross claim . If it exceeds
then limit your answer to gross claim.

Treatment of Abnormal items or slow-moving items or poor

selling line of items:

Abnormal goods refer to outdated and obsolete goods whose

demand has decreased due to innovation and invention. So,
the realizable value of these goods is generally below cost.
So, these goods are valued at NRV.
For the purpose of the determining the normal GP%, these
goods are brought to cost in trading a/c. whenever abnormal
goods are given in the question, prepare memorandum
trading a/c in columnar for and determine the stock
separately for each type of goods.
In memorandum trading a/c , abnormal goods sold are
recorded at sold amt and loss on sale is also recorded and
carried down.
For reference:
Sale of goods on approval – journal entries
 on the date of sending the goods to the buyer:
Debtors a/c Dr
To sales ( @sales val)
 on year end (when goods are pending approval)
o sales a/c Dr
to Debtors a/c (@sales val)
o goods with customer on approval a/c Dr
to trading a/c

so, reduce goods sold on approval but not approved

from sales and Dr stock with customer(@cost) to the
trading a/c.

Calculation for loss of profit due to fire

loss of profit policy refers to a policy which enables the entity
(insured) to recover the foll 3 things from insurance co.
 decline in profits caused due to decline in sales caused
by fire
 fixed exp (insured standing charges)
 addn exp (ex. Rent of the new premises)
every loss of profit policy will have 2 periods mentioned
in it:
o policy period- the damage must take place during
this period. It is for 1 year.
 o Indemnity period- Max period for which insurance
co. will compensate the insured

Calculation of claim under loss of profit policy:

 Step 1: Calculation short sales

Standard sales xxx
+/- trend in sales xxx
xxx
(-) Actually sales (xxx)
Short sales xxx

 Step 2: Computation of GP%

(NP of Py + ISC ) X 100 = xx ( GP=UISC+ISC+NP py)
Sales of py (GP- UISC=ISC+ NP py)
+/- trend in GP = xx
(ISC= insured standing charges)

 Step 3: computation of GP lost

Short sales X GP% = xxx

 Step 4: calculation of additional exp:

Least of the following :
o Actual additional exp ( AAE) xxx
 o Proportionate additional expenses= xxx
AAE X GPR X AAT
GPR X AAT+UISC

AAE= Actual additional exp

GPR= gross profit ratio (i.e. GP%)
AAT= Adjusted annual turnover.
UISC= uninsured standing charges

o RITA X GPR xxx

(if RITA is not available use actual sales )
RITA= Reduction in turnover avoided
(extra sales generated by incurring additional
expenses)

 Step 5: Calculation of Gross Claim :

GP loss (step 3) xxx
+ claim for additional exp xxx
- Savings in insured standing charges (xxx)
Gross claim xxx

 Step 6: Computation of Net claim

a) By applying any clause
Policy value X gross claim
GPR X AAT
 b) Without applying Avg Clause:
Gross claim or PV  lower of the two

Types of Sales req to solve the q on loss of profit

Policy value to be taken :

The following steps are applied
 Step 1: Determine expected sales for the prospective
policy period.
 Step 2: Determine expected GP for the prospective
policy period ( Expected sales- Expected COGS )
 Step 3: Determine Increase in Standing charges to be
incurred in the prospective policy period.
 Step 4: Determine Uninsured standing charges (UISC)
 Step 5: Policy val to be taken
= expected GP + Increase in standing charges - UISC

Notes:
Increase in Sales volume = increase in CP