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INSURANCE CLAIMS
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THEORY NOTES
9,00,000
90,000 Long Answer Type Questions (15 Marks)
I

1. )What do you mean by loss of stock insurance? Discuss the various steps to
/ calculate claim under loss of stock insurance. (April 201 O)
Or
Explain the various steps for ascertaining the loss of stock by fire.
~.90,000 . Or
How will you ascertain the claim for loss of stock on the date of fire? (Sept. 2007)
Or

~ Explain the procedure tor calculating insurance claim for loss of stock. (April 2009)

l8.000 I I Ans: Meaning of Loss of Stock Insurance:

•
Loss of stock insurance refers to the insurance policy taken by a business enterprise lo get itself
insured against the loss of stock on the happening of certain events such as fire, flood, theft, etc.
I
This policy is usually taken for a year against payment of certain amount of premium to the
I insurance company. The claim tor loss of stock accepted by the insurance company is usually ·
restricted to actual loss of stock or the policy amount, whichever is less.
I
I
- 1 Steps for Ascertaining the Loss of Stock by Fire:
,000 ,
=.J Step 1: Calculate Gross Profit Ratio.
It the rate of gross profit of the last year/s is given in the question, step 1 is not required. In
case it is not given then it must be calculated by preparing the 'Trading A/c' ol the
· preceding year or years.
Step 2: Ascertain the value of stock on the date of fire:
· The value of stock on the date o~ire can be ascertained by preparing a 'Memorandum
7 Trading Account' ot the current year upto the date of fire. The following is a specimen of
the 'Memorandum Trading Ale'.
) / Memorandum Trading Ale
(for the period from 1st day of the accounting year to the date of lire)
{ t
I To Opening Stock
... . By Sales less returns
t •••

• • ••
I To Purchases less returns
••• •
To Direct Expenses
By Closing Stock
To Gross Profit(% on sales as
... . (Balancing Figure) •• • •
calculated in Step 1)
• ••• ....
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FINAL-TOUCH TO FINANCIAL ACCOU NTl~JG (
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Step 3: Ascertain the actual amount of claim to be lodged t1l ,
I'
The actual amount of claim for the loss of stock to be lodged with the insurance company , ·\
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is ascertained as follows: I: Ste
Value ·of Stock on the date of Fire (As per Memorandum Trading A/c) •• ·••
g
~

Less: Value of Stock salvaged r

f.
Value of Stock destroyed by fire (i.e. Amount of Claim)
(subject to Average Clauso as explained 1n Step 4)

Step 4: Apply Average Clause • • 1 · 'he 'Average

In case of under insurance, the final amount of claim 1s calculated by app ymg '
·

Clause' as follows: Pol cy Value

Net Claim = Value of Stock Destroyec X
Value of St::ick on the date of fire
of claim is
2. What do you mean · by 'Loss of Profit Insurance'? How the value
determined under this policy? (October 2012, Marks 15)
Or
to be
What do you understand by 'Loss of Profit Insurance'? Explain various steps
(Sept 1999)
· followed for the calculation of loss of profits.
Or
of claim is
What do you mean by 'Consequential Loss Policy'? How the amount
{April 1998)
• I
· computed under this policy? ·
Or
l;-low will you ascertain the claim for lass o1 profits as a result of fire?
(Sept 2001i2 007)
Or
tation ·
What is 'Consequential Loss'? Discuss the various stages involved in compu
conne ction.
of an insurance claim for it, explaining fully various terms used in this
(April 2002)
Or
· Expla_ln different steps for ascertai~lng the amount of claim for the Loss
of Profit
(Oct. 2002)
Policy.
Or
you will
fl ' ·Explain the meaning of a •~oss of Profit Policy'. Explain the various steps
r- take for ascertaining the amount of claim under a loss of profit policy.
.., Or
(Sept. 2005)

profit as a
Explain the· procedure for calculating Insurance claim for loss of
(April 2009}
,1 ,
consequence of fire.
Ans: L9ss of Profit or Consequential Loss Polley:
ery, stock etc
When a fire occurs in a business, not only the asasts like building, furniture , Machin
s leading to trading losses. In
are destroyed but it also results in partial er total stoppage of busines
Consequential
1, '. order to cover the risk of loss of profits, a separate policy known as 'Loss of Profit or
Loss Policy' may be taken. This policy covers :he fo lowing risks:
(a) Loss of profits due to partial or total stoppage of business activities.
. director's fees
(b) Loss on account of payment of Fixed.'Standiri~ charges such as ·ent, sal aries
etc. These expense s are incurred even if the ·:,,_siness Is discontinued for some period.
n in sales
(c) Loss due to increased cost of working in,:urred for the purpose or avoiding reductio
during the dislocation period like taking or.·rent some other premises temporaril y etc.
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CHAPTER 14: INSURANCE CLAIMS

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S~eps to be followed for the calculatlon of loss of profi
ts:
7
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J ·. . Or ·· Policy':
y !I. .
t, .. ent1aJ Loss
Procedure for computing amount·of claim under 'Consequ
· · · . ff ted by tire
Step 1: Calculate Short Sales ·. · · . . d . the· perio d a ec d in the
. unng d'ng perio
S_hort sal~s is calculated -by comp aring the sales made 1
of the correspon
(maximum up t> the indemnity period) with the sales
. · · . . d mnily period
previous year. · IT ver during ,n he •mmediately
urno
Short Sales = Standard Turnover (adjusted) - Actua 12 mont 5
1
s the turno ver during that perio d in the ·
'Standard Turnover' mean
nity period. ptember,
before the date of fire which cor·esponds with the indem
,h
· ed up to 30 5 ~ , 2001 ·
t continu ,h September
For example, a tire occurred on 1 May 2001 and its effec 2001
st
30
Sales from 1':hMay to were< 3,50,000.
2001 . Period of Indemnity is 6 11onths. 2000
September,
are only " 50,000, while sales from 1 May 2000 to 30
st

In this case the short sales·will be calculated as follow s:

3,50,000
st th 2000
Sales during 1 May 2000 to 30 Septe mber 50,000
1
Less : Sales du·ing 1 May 2001 to 30 h September 2001
st
3,00,000
Short Sa es , -· .
·· . thO ear of firef aro higher or
. . Y h rt /es
compared 10 the previous year, sales m
Note: If ,t 1s known that O 5 0 sa ·
to ascertain the amount
lower, the sales of the previous y:1ar should be adjusted
year preceding the year of fire.
Step·2: Calculate Rate of Gross Profit of the financial
Net :~rofil (before tax) + Insured Standing Charges X 100
Rate ot Gross Profit =- -·········--·······---········· ·--······
·--···························- ·
Net Sales of the financial year preceding the year of fire
Step 3: Calculate Loss of Profit on Short Sales.
Loss of Profit = Short Sales x Rate of Gross Profit
Step 4: Add increased cost of working.
nses incurred for the purpose of
Increased co·st of working means additional expe
claim for additional expenses is
minimizing the loss on account of _short sales . The
restricted to the lowest of the fellowing amounts:
(a) Actual expenses incurre,j
nses.
(b) Gros s Profit on sales generated by the additlonal expe
Net Profit + Insured Standing Charges
ional Expe_nses
(c) •··--------··- ···----·--- --········ -·-------------- X Addit
Net Prcfit + All Standing Charges
Or ··
.__Gross Pre-fit on annual turnover(adjusted)
Expenses
--------·---------·------·-·········-······---------····· X Additional
Gross Pro:it + Uninsured Standing Charges
d as a result of fire from the total claim
Step 5: Deduct the amou nt of standing charges save
as calculated in Step (4).
Step 6: Apply Average Clause.
ct to the average clause if the sum
The gross clam as cal-:u iated in step (5) will be subje
by applying the rate of gross profit
insured under the poHcy is les3 than the sum produced
to annual turnover.
hs immediately before the ·date of fire.
'Annual Turnoi,,er' means the turnover during the 12 mont
. Amount [Link]
Net Claim tor loss of profit = Gross Claim X ----------·.----·------ --- -- -·-
...- -... - ...-.
(As per Avera9e Clause) Gross Profi i on Annu al Tu rnover

---- .,
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the _impo~tant terms
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3 · What Is consequential loss poiicy for insurance claim? Explain
under this pollcy.
used in this type of policy and the proc edur e to file a claim (April 2013)

Ans: Consequential Loss Policy: (Please refer to 0. No. 2)

Important Terms used in Consequential Loss Policy:
ing charges.
(1) Gross Profit: It Is the Sl•m ot net profit and 1nsurr.d stand
(2) Net profit: It is the net trading profit (exclusive of
all capital receipts and accretions and all
ess ot the insured at the premises
outlay properly chargeable to capital) resulting from the busin
charges including depreciation
after due provision has been made for all standing and other
(3) Standing Charges: II means all expenses
which do not reduce proportionately with a
re::1uction in turnover (or safes).
(4) Insured Standing Charges: It means those charg
es specified in the policy which the insured
ing:
wants to recover in the case of loss.' /I may include the follow
rafts ;
(a) Interest on debentures, mortgages, loans and bank overd
(b) Insurance premium;
(c;- Advertising;
(d) Rent, rates and taxes (excluding taxation chargeable
on profit);
(e) Office expenses;
(f) Salaries to permanent staff and wages to skilled
employees;
(g;. Postage, telegrams & telephone;
(h; Printing and stationery;
{i) Company's contribution to the provident I gratuity fund;
(j) Electricity I Power charges;
(k) Mairilenance of building, plant and machinery;
(I) Labour welfare charges:
(m) Depreciation;
(n) Director's fees I Auditor's fees:
(o) Legal expenses;
(p) Travelling expenses I Motor car expenses:
of the amount of slanding charges
(q) Miscellaneous standing charges not exceeding 5%
specified.
(5) Indemnity Period: It is the maximum period speci
fied in the policy for which loss of profit is
~o·.;ered. This period is d~cided at• the time when policy
is taken by the insured. The indemnity
d 12 months.
oeriod starts from the date of fire and usually does not excee
is disturbed due to fire. This period
(6) Period of Claim: It is a period during which the business
consequential loss policy . If the loss of
5/)a/l not exceed the indemnity period covered under the
insurance company will allow claim
:irofit arises for a period larger than indemnity period, the
Jny tor the indemnity period.
profit earned on the turno ver during the
(7) Rate of Gross Profit: It refers to the rate of gross
'inancial year immediately before the date of fire. This rate
,s calculated as follows :
,.. P t· Net Profit + Insured Standing Charges x 100
Rate of llross ro 1t ·= T ·
urno ~r
g 12 months immediately before the date
(8) Annual Turnov~r: It means the turnover made durin
ot fire.
during that period in the 12 months
(9) Standard Turnover: It means the turnover made
the indemnity period.
immediately before the date of tire which corresponds with
indemnity period.
(1 0) Actual ,:-urnover: It means the turnover made during
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Procedure to FIie a Claim under Consequential Loss Policy:
Tile procedure to file a claim under consequential loss policy is explained below:
Inform about Damage to the Insurance Company: In the avent of fire the insured mu 5t
irnrnedintoly inform about the damage to the insurance company.
Fill and Submit Claim Form: As soon as loss ot profit during indemnity period has become ki:own,
the insurance company must be notified without delay through 'Claim Form' duly_filled and signed
by the insured. The following information is usually required to be filled in the Claim Form:
(a) · Name, address and mobile no. of the insured;
(b) Policy No./ Cover Note No.;
(c) Period of insurance;
(d) Details of consequential loss:
• Period for which the insured business was interrupted due to fire;
• Annual turnover of the preceding financial year;
• Estimated reduction in turnover due to interruption;
• Estimated loss of gross profit due to interruption;
• Standing charges;
• Expenses incurred for loss minimization;
(e) Details of previous losses (if any):
• Claim year
• Claim description;
• Amount
. I Details of other insurance (if any):
(f'
• Name of the insurer;
• Policy No.
• Period of insurance;
• Amount of insurance.
Furnish Necessary Information / Documents. Required by the Insurance Com~any: ~he
insured is also required to furnish all invoices, documents, [Link] and other relevant 1nformat1on
required by the insurance company. The basic information I documents usually required by the
insurance company are:
(i) A copy of F.I.R;
(ii) Books of accounts/ vouchers/ invoices etc.;
(iii) Ac1ivities carried out at other premises;
(iv) Details ,of increased cost of working;
(v) Details of savings in standing charges;
(vi) Details of trends in business.
'
Computation of Amount of Claim: (Please refer to 0. No. 2 for details about procedure tor
computing amount of claim under consequential loss policy)
Settlement of Claim: On receipt of claim form and other necessary documents from the insured,
the insurance company verifies whether the essentials of a valid claim are satisfied or not. For
example, no claim in respect of consequenHal loss is admitted unless there is also an admission of
liability for loss of stock or property. An official or loss surveyor employed by the insurance
company will investig_ ate the claim. On t_he basis of claim form and the investigation report, the
insurance company will then settle the claim.
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FINAL·TOUCH TO Fi°NANCIAL ACCOUNTING
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Short Answer Type Questions (5 Marks)

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.

4. short note on 'Loss of Stock Insurance Po![Link]'. . . .,

~ Loss of stock insurance policy refers to an insurance policy ta~~n by a business e~terpnse to ~el:'~-
·, itself insured against the loss of stock on the happening of certa_m events such as fire , fl?od, theft, ij
etc. This policy is usually taken for a year against payment of certain amount of premium to the·~
insurance company. The claim for loss of stock :1ccepted by t1e ·insurance company is usually ~
restricted to actual loss of stock or the policy amount, whichever is less. The various steps 101 ft
ascertaining the loss of stock by fire are given beiow: · .~
1~

.
Step 1: Calculate
.
gross profit ratio by preparing lh·e 'Trading A/c' of the preceding year or years. !·
~

Step 2: Ascertain the value of stock on the date of fire by preparing a 'Memorandum Trading·A'c' ~ I':\•

of the current year upto the date of fire. '!&, 7

Step 3: Ascertain the amount of claim for loss of stock to be lodged with the insurance company as ffe
/
follows: ......
'
l
Value of Stock on the date of Fire
1. I
[Link]: Value of Stock salvaged
Value of Stock destroyed by fire (i.e. Amount of Claim) ~~

Step 4: In case of under insurance, apply 'Average Clause' to ascertain• the final amount of cla rn /
as follows:
Policy Value
Net Claim = Value _of Stock Destroy:;c X
Value of Stock on the date of fire

5. Write short note on 'Memorandum Trading Account'. (Sept. 2007 ; April ·2008) :-:·,
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;.".
Ans: Memoran dum Trading Account: !:..-

Memorandum Trading Account is an account which is prepared in case of loss of stock by fi re to~
ascertain the value of stock on the date of fire. T1is account is prepared is prepared for the current \?
year up to the date of fire. The following is a speciman of the 'Memorandum Trading A/c'. t:;.
!i,
~emorandum Trading Ale {·
(for the period from 1st day of the a~ounting year to the date of fire)
t ~ 1'

To Opening Stock
• t ••
By Sales less returns ••••
I
'
'lit • t •
To Purchases less returns
••••
i
: By Closing Stock . .... !
To Direct Expenses
To Gross Profit(% on sa·les)
.. ' . I

. (Balancing Figure)
i·

..... i

'
.. .....

6. 1te short note on "Average Clause". (Sept. 1997/2007 /2012; April 2009)

s: When a fire insurance policy is taken, it may inclLde an "Average Clause". This clause is inserted to
discourage under insurance of stock or any other asset. As per this clause, if the value of stock on
the date of fire is mor~ than the policy value, ins 1Jrance company will not be liable to pay fu ll value
of loss of stock, only proportionate amount will be payable. ·
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l J : : HAPTER 14: INSURANCE CLAIMS ' ,' ,, . d by applying the 'AVera9° c iausO

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:f· . . f laim is calculate
in· case of under insurance, the final amount o c · ..
~- as follows: Policy Value _______
t:! ----------·-~·

OC
~e ~-
t' I . Net Claim : Value of Sto~k Destroyed . X -~;lz;~;-;;~~~-;~ the date of _fire
. . . o ooo. Subseque
nllY

th1;fI,B . . . . . t fire tor a sum of ~ 6,0 , . 00,000 was

n the ~ For Example; A merchant got hrs stock insured agarns 00 Stock of the value of ~ ?·
tor loss of
·uaJly
,
."'f fire occurred and destroyed a pan of stock of t' S,SO,O :
e
se the amount of claim
rn this. ca ,
1 .
s 1o, ~ ~ . was subject to
salvaged . The policy average
. c aus · .
t~ stock will be calculated as follows:
'It
t'· 6,00,000
,.
'F{.
f~ . for loss of stock = 5,50, 000 x ·------------ -- f 4 ' 40,000
Net claim
·Ale' 1,j~-
t1. 7,50,000
r:.:• (Sept. 2004)

iy as (;
t 7. Write Short Note on "Loss of profit insurance policy".
Or
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(March 2013 compartment)
.. Briefly discuss the 'Consequential Loss Policy' .
Xns:
::
·Loss of .Profit Insurance
. .
Policy/ Consequential Loss Policy:_
· · . • d' f rniture
.· .
Machinery,
t k otc
5 oc "'
1
;J When a frre oc-:::urs rn a business, not only the assets hke bUI! ~9, u . . ' to tradin 9 losses. In
:-~ are destroyed but it also results in partial or total stoppage of business leading t·
lam ·.,· . · . known as 'Loss of Profit or Consequen 1a 1
order to cover the nsk of loss of profits, a separate policy
Loss Policy' may be taken. _This policy covers the following risks:
(a) . Loss of profits due to partial or total stoppage of business activities.
(b) Loss on account of payment of Fixec/Standing charges such as rent, salaries, director's fees
etc. These expenses are incurred eve1 if the business is discontin_ ued for some period.
08) ~/ (c) Los~ due to increased cost of workin•J incurred for the purpose of avoiding reduction in sales
. ....
. during the dislocation period like taking on rent some other premises temporarily etc .
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ito ~ 8. Write short note on "Short Sales" . . (Sept. 2007)

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tns: Short Sales:
!!'
Calculation or short sales is the first step to be followed while computir;g ~mount of claim under
'consequential l~ss policy'. Short sales is calculated by compa~!n.g..the sales made during the period
affected by fire (maximum up to tile indemnity period) with the sales of the corresponding period in
the previous year.
Short Sales = Standard Turnover (adjusted) - Actual Turnover during indemnity period
'Standard Turnover' means the turnover during. that period in ,the 12 months immed·ia teIy before the
. . . .
date of fire which corresponds with the indemnity period.
r.'
urred on 1'' May 2·J09 and Its effect continued up to 30'h s
t ·
- ;, f
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For example, a fire occ_
t
Period of Indemnity is 6 months. Sales from 1s May ·2009 to 30'h Septemb ;6ember, 200 ~-
.are only ~
50,000, while sales from 1 May 2008 to 30 September, 2008 were ~ 3
09
:.1 i 51 th
so o~o
I
<
short sales will be calculated as follows: ' ' · n this case the
r,
(\

3)
Sales during 1s, May 2008 I-:> 30 h September 2008
1
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3 ,SO,OOO
tot st
Less: Sales during 1 May 2009 to 301h September 2009
,n Shon Sales 50,000
,e 3
Note: If it is known that compared to the previous year, sales In the year of . ,0~,000 ·
the sales of the previous year should be adjusted to ascertain the am fire are higher or lower,
. aunt of short sales.