INSURANCE CLAIM

LOSS OF PROFIT
Definitions:

1. Insured : Who takes the policy.

2. Insurer : Insurance company.

3. Turnover : Sales.

4. Indemnity period : Period when the normal activities are believed to be disrupted. The maximum

span of this period is 12 months.

5. Period of claim : Lower of the two – (a) Indemnity period, (b) Actual period of dislocation.

6. Gross Profit = Net Profit + Insured Standing Charges

Or = Insured Standing Charges – ( )

7. Standing Charges : Fixed expenses which have to be paid irrespective of the reduction in sales.

(a) Insured Standing Charges and

(b) Uninsured Standing Charges.

8. Standard Turnover : Turnover during the period in the 12 months immediately preceeding the date

of damage. Ex- Date of fire 1 st July 2015 and indemnity period is 6 months, then Standard Turnover

is the turnover for the period from 1st July 2014 to 31st December 2014.

9. Short Sale : It is the amount of fall in sales due the accident.

Short Sale = Standard turnover – Actual turnover during dislocation period.

10. Annual Turnover : It is the Turnover during the 12 months immediately preceding the date of fire.

Ex – Date of fire 1st July 2015, Annual Turnover is the turnover for the period from 1 st July 2014 to

30th June 2015.

11. Increased Cost of Working : Additional costs incurred after accident, i.e.; Rent paid for hiring new

godown.

12. Savings in Standing Charges : Amount of fixed expenses that are saved during dislocation period.

13. Average Clause : Incase of Under insurance.

 Ascertaining the Insurance Claim

Step – 1: Rate of Gross Profit =

Step – 2: Short Sale = Standard Turnover – Actual turnover

Step – 3: Gross Profit lost due to Short Sale = Short Sale X Rate of Gross Profit

Step – 4: Determination of Increased Cost of Working. Least of the three:

(a) Actual additional expenses due to increased cost of working

(b) Sales due to increased cost of working (enhanced sales) X Rate of Gross Profit

(c)

Or

Note: If additional sales due to additional expenses are not given in the problem, then the

total sales during the indemnity period is to be assumed as Enhanced Sales.

Step – 5: Net Claim = Gross Profit lost due to Short Sales – Admissible additional expenses – Savings in

Standing Charges.

Step – 6: Average Clause:

(a) Insurable Value (Gross Claim) = Adjusted Annual Turnover X Rate of Gross Profit

(b) If Policy Value or Sum assured < Gross Claim, then it is a case of under insurance and the

principle of Average Clause is applied.

Therefore, Net Claim to be lodged to the insurance company