Insurance Claims

Insurance Claims

A businessman takes the Fire Insurance Policy to protect his assets mainly stock from any risk of loss due to fire.

Usually the Fire Insurance Policy secures the loss of assets (including Stock) and loss of profit.

In case of fire the most important thing is to calculate the value of stock on the date of fire. Normally the trading account shows the value of stock as on the last day of the year, however as the fire can occur at any day  so to calculate the value of stock on the date of fire a special account called as “Memorandum Trading Account” is prepared.

Memorandum Trading Account
For the period form 1st  Day of Year to the Date of Fire
Particulars	Amt	Particulars	Amt
To Opening Stock	XXX	By Sales                                     XXX
To Purchase                            XXX		(-) Returns                                XXX	XXX
(-) Purchase Return               XXX	XXX
To Direct Expenses	XXX	By Closing Stock	XXX
To Carriage Inward	XXX	(Balancing Figure)
To Wages	XXX
To Gross Profit (%on Sales)	XXX
	XXX		XXX

Based on the value of the stock on the date of fire as arrived from the Memorandum Trading Account the Actual Amount of Claim is calculated.

Loss of Stock (Amount of Claim) = Value of Stock as per Memorandum Trading Account

                                                 Less:- Salvage value of stock

Average Clause – The value of the insurance policy is decided by the business baseId on the average stock held by the business. However sometimes the business takes an Insurance policy for the value lesser than the value of the stock which is known as “Under – Insurance”.

To discourage the system of Under – Insurance the Insurance policy contains an “Average Clause”. This clause is applicable at the time of calculating insurance claim, if the value of stock on the date of fire was more than the policy value. In the event of a partial loss, the insurance company pays a proportional amount of claim.

Net Insurance Claim = .                   Policy Value                   X  Loss of Stock

                                        Value of stock on the Date of Fire

Gross Profit Ratio: Usually Gross Profit Ratio is used to calculate the amount of Gross Profit in the period of Loss.

Gross Profit Ratio = Gross Profit X 100

                                    Net Sales

Note:- If there are any Slow Moving Goods (i.e. goods not in demand or damaged Goods or Goods of Poor Selling Line) in the opening or closing stock, Such stock should be removed from last year’s stock for the purpose of calculation of Gross Profit Ratio; also if sales includes sale of any such goods, that should also be ignored while calculating Net Sales.