Insurance claims

Claims for loss of stock and profit

Stock insurance

A fire insurance claim is lodged with the insurance company for the loss of stock and other assets by fire. To lodge claim for the loss of stock by fire, the value of stock in trade on the date of fire has to be estimated.

Factors to be considered for the estimation of stock in hand on the date of fire
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2.

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4.

Identify the percentage of gross profit on sales for the computation of cost of goods sold Prepare memorandum trading Account to calculate the value of closing stock as balancing figure Deduct the value of stock salvaged from the value of closing stock determined earlier Average clause will be applied if the value of stock lost due to fire is more than the amount of policy taken Value of stock destroyed x Value of insurance policy Value of the stock on the date of fire

Consequential loss or loss of profit insurance

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3.

Consequential loss insurance indemnifies the insured any loss of profit suffered by him consequent on the destruction of business properties by fire. The following forms of profit losses due to fire will be covered: Loss of profit due to inability to produce and sell Loss of standing/fixed charges due to their non-recovery or less recovery because of no production or less production as a result of fire Increased cost of working as a result of fire such a s renting a new business place temporarily for conducting the business operations

Computation of claim for loss of profit

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2.

Calculate short sales by comparing the sales made during the abnormal period in the year of fire with the sales of the same period of the year preceding the year of fire Rate of gross profit computed as follows: Net profit + Insured standing charges X100 Sales of year preceding the year of fire If there is net loss: Insured standing charges Net loss X 100 Sales of year preceding the year of fire

3. Calculate loss of profit on short sales by applying the rate of gross profit as calculated in step 2 4. Add increased cost of working incurred to mitigate the effect of the loss on account of short sales to the loss of profit as calculated in step 3. The claim for increased cost of working is restricted to the lowest of the following amounts:
a) Actual increased working expenses b) Net profit + Insured standing charges X increased working expenses Net profit + All standing charges or Gross profit on preceding 12 months sale (Gross profit on preceding 12 months sale + Uninsured expenses) X increased working expenses C) Short sales avoided through increased cost of working X Rate of gross profit

5. Deduct the amount of expenses saved as a result of fire from the total claim as calculated in step 4 6. The gross claim in step 5 is subject to average clause as follows: Gross claim X Amount of policy Gross profits on 12 months sale preceding the date of fire