1. INSURANCE CLAIM
PRINCIPLES AND TERMS OF INSURANCE BUSINESS
Principle of indemnity: Insurance is a contract of indemnity. The insurer is called indemnifier and the insured is the indemnified. In a contract of indemnity , only those who suffer loss are compensated to the extent of actual loss suffered by them.
Insurable interest: All and sundry cannot enter into contract of insurance. For eg. A cannot insured the life of B who is a total stranger. But if B happens to be his wife or his debtor or business manager, A has insurable interest and therefore he can insured the life of B.
Principle of UBERRIMAE FIDEI: Under ordinary law of contract there is no positive duty to tell the whole truth in relation to the subject matter of the contract. In a contract of insurance, however there is an implied condition that each party must disclose every material fact known to him.
Catastrophic loss: A loss which is unbearable i.e. it causes severe consequences such as bankruptcy
to a family, organisation or insurer.

2. STOCK INSURANCE
Every business unit has to keep a sufficient quantity of stock in the business premises for meeting the requirements of sales or manufacturing the goods. The stock kept in the business premises is subject to risk of loss by fire. For protecting itself against such loss, a business unit takes a fire insurance policy covering the loss of stock by fire. A fire insurance policy which covers such loss is known as loss of stock policy in which the insurance company undertakes to compensates the business unit for loss of stock by fire in consideration of a payment called premium.
A fire in a business place destroys a no. of assets such as building, machinery, furniture , stock etc. so it is in the interest of the business unit to take a fire insurance policy to indemnify itself against the loss of stock and other assets.

3. HOW TO CALCULATE THE AMOUNT OF CLAIM TO BE LODGED FOR THE LOSS OF STOCK BY FIRE:
Various points which are considered for the estimation of stock in hand on the date of fire are given below:
The most important point is the percentage of gross profit on sales so that cost of goods sold during the year of fire may be as curtained. In the absence of any special circumstances, the percentage of gross profit on sales earned last year is applied to the current year. Therefore, trading account of the last year may be referred to determine the gross profit ratio of the last year.
The next step s to Memorandum trading account of the current year upto the date of fire on the basis of opening stock, purchases and sales from the beginning of the year upto the date of fire and estimated gross profit on the basis of last year’s gross profit ratio.

4. 3. The third step is to deduct the value of stock salvaged , if any, from the value of stock as ascertained in step to, the resultant figure is the amount of claim for the loss of stock to be lodged with the insurance company.
For calculating the claim, besides three points stated above, the following aspects should also be considered.
If stock in trade of the last year was not valued at cost, it should be adjusted to cost to ascertain the correct percentage of gross profit on sales to be applied to the current year.
If there is a poor selling line stock in opening and or closing stock, such stock should be eliminated from the Trading account of the last year to get the gross profit ratio to be applied to the current year. Any sale of poor selling line should also be deducted from the total sales to find out the normal sales.

5. iii. When gross profit ratios for a no
iii. When gross profit ratios for a no. of years are given, an average of these may be ascertained for finding out the gross profit ratio to be applied to the current year. But it is not advisable to take the average gross profit ratio in case of a continuous and persistent fault in the rate of gross profit from year to year, rather a reasonably declining rate of gross profit as compared to the previous year should be applied in the current year.
iv. Fire fighting expanses. Such expanses incurred on the date of fire for the purpose of salvaging the goods from fire are to deducted ( if allowed ) before calculating the total loss or gross claim and applying the average clause.

6. 4. Under insurance: Inadequate insurance coverage by the holder of a policy. In the event of a claim, underinsurance may result in economic loses to the policy holder, since the claim would exceed the maximum amount that can be paid out by the insurance policy. While underinsurance may result in lower premiums paid by the policy holder, the loss arising from a claim may far exceed any marginal savings in insurance premiums.
The insurer applies average clause to determine the amount of valid claim in the event of under insurance. The insured has to bear a portion of the loss himself.
5. Average clause: In order to discourage under-insurance, fire insurance policies often include an average clause. The effect of this clause is that if the amount of the policy is less than the value of the subject-matter insured, the insurer will be liable only for that proportion of the loss which the amount of policy bears to the total value of the subject-matter. For example, if stock worth Rs 4 lakh is insured only for Rs 3 lakh and if the loss amounts to Rs 1,80,000, the claim admitted by the insurer will be Rs 1,80,000 x 3,00,000/4,00,000 = Rs 1,35,000.

7. ASCERTAINMENT OF CLAIM WHEN ABNORMAL ITEMS OF GOODS ARE AVAILABLE (OR POOR SELLING GOODS)
Abnormal items of goods are those which cannot be sold at the normal price or has a slow rate of turnovers. The following are the main steps involved in calculating the claim in the presence of abnormal lines or goods:
STEP 1 : PREPARATION OF LAST YEAR TRADING ACCOUNT
While preparing last year trading account stock, Purchases and sales of normal goods must be considered in arriving the gross profit.
STEP 2 : CALCULATION OF RATE OF GROSS PROFIT ON SALES
Rate of gross profit= gross profit on sale of normal goods x 100/sales of normal goods

8. STEP 3 : PREPARATION OF MEMORANDUM TRADING ACCOUNT
While preparing this account, value of abnormal goods included in opening stock, purchases and sales must be deducted from the respective item and is to be shown in a separate column for abnormal items.
STEP 4 : CALCULATION OF ACTUAL AMOUNT OF LOSS
Actual loss of stock= stock of normal goods on the date of fire + stock of abnormal goods on the date of fire – stock salvaged + expenses for extinguishment of fire.
STEP 5 : CALCULATION OF AMOUNT OF CLAIM
There would not be any difference in calculation of amount of claim on account of existence of abnormal goods. If the amount of policy is less than the total stock then average clause is applied as there is under insurance.

9. CONSEQUENTIAL LOSS ( OR LOSS OF PROFIT ) INSURANCE
Consequential loss insurance indemnifies the insured any loss of profit suffers by him consequent on the destruction of business properties by fire. An ordinary fire insurance policy covers the loss on account of stock or properties destroyed by fire, but it does not cover loss of profit due to inability to produce or sell on account of fire. Therefore, a separate policy known as consequential loss policy is taken to cover the following losses due to fire:
Loss of profit due to inability to produce and sell.
Loss of standing or 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 as renting a new business place temporarily for conducting the business operations.