UNIT – 4

INSURANCE
CLAIMS By
Prof. Suku Thomas Samuel
Department of Management
Kristu Jayanti College
 INSURANCE - Meaning
Insurance is an arrangement by which a company or the state
undertakes to provide a guarantee of compensation for specified
loss, damage, illness, or death in return for payment of a specified
premium.

• Helps in protecting from losses due to unexpected events.

• Used in hedging risk.
• Terms and conditions of the cover is well defined.

2
INSURANCE - Types
Insurance can be broadly classified into two categories.

LIFE INSURANCE GENERAL INSURANCE

• Vehicle Insurance
• Marine Insurance
• Health Insurance
• Fire Insurance
• Transit Insurance

3
 FIRE INSURANCE
Insurance is an arrangement by which a company or the state undertakes to
provide a guarantee of compensation for specified loss, damage, illness, or
death in return for payment of a specified premium.

Fire insurance provides protection:

• Immovable assets.
• Movable assets.
• Life and medical expenses of personnel involved.

4
INSURANCE CLAIMS – IMPORTANT
TERMS
1. Insurance: It is an agreement between Insured and Insurer to compensate the losses
suffered due to uncertainties in future, for a consideration called premium.

2. Insured: The person who has suffered the loss and shifts it to the insurer is called the
insured.

3. Insurer: The person who agrees to bear the risk of loss arising on account of loss of
stock, property profits etc., due to calamities; and compensate such loss is called Insurer.

4. Premium: The consideration for which insurer will take up the burdon of loss is called
premium.

5
INSURANCE CLAIMS – IMPORTANT
TERMS
5. Insurance claim: The process of requesting for the reimbursement of loss due to the
unexpected event. Claim form needs to submitted with the supporting documents for the
insurance company to release the claim amount.

6. Salvage: Salvage refers to the amount of goods saved from fire.

7. Under insurance: A condition where the insurer has not taken sufficient insurance
cover to protect itself from possible damage.

6
INSURANCE LAIMS – IMPORTANT TERMS
▹  
8. Average Clause: Applicable when the firm is under insured. The 'average clause' is
defined as a clause in an insurance policy requiring that you bear a proportion of any loss
if your assets were insured for less than their full replacement value.

Amount of Claim = Policy Amount x

7
ACCOUNTING TREATMENT – INSURANCE CLAIM

Preparation of
Preparation of Memorandum Ascertain the
Trading Account Trading Account amount of claim

1 3 5

2 4 6

Ascertainment of Ascertain the Amount Paid

rate of gross profit actual amount of
loss

8
STEP – 1 : PREPARATION OF TRADING ACCOUNT
A trading account is prepared for the preceding year of fire for the purpose of ascertaining
the amount of gross profit. This step is necessary when ratio of gross profit is not given.

9
STEP – 2 : ASCERTAINMENT OF RATE OF GROSS PROFIT

10
STEP – 3 : PREPARATION OF MEMORANDUM TRADING
ACCOUNT
Prepare Memorandum Trading Account up to the date of fire by collecting figures in
respect of opening stock, purchases, direct expenses and sales from the record.
Memorandum Trading Account is nothing but trading account prepared to ascertain the
estimated stock on the date of fire accident.

11
STEP – 4 : ASCERTAIN THE ACTUAL AMOUNT OF
LOSS

12
STEP – 5 : ASCERTAIN THE AMOUNT OF CLAIM
For the amount of loss incurred, the claim must be calculated. Calculation of claim
depends on the extent of insurance on the value of goods.
▹ a. When the stock is properly or over insured, the amount of claim will be the same as
amount of loss.
▹ b. When the stock is under insured
▸ If the entire stock is destroyed, the policy amount would be the amount of claim
▸ If only a portion of goods are destroyed, the amount of claim can be calculated
using the following formula.

13
 Problem No - 1

From the following information calculate the amount of claim by applying

average clause.

Particulars Amount
Loss of stock by fire 4,00,000
Amount of policy 3,42,000
Total value of the stock on the day of fire 4,56,000

14
 Problem No - 2

From the following information calculate the amount of claim by

applying average clause.

Particulars Amount
Value of stock on the date of fire 25,000
Value of stock saved from fire 5,000
Value of the Insurance Policy 20,000

15
 Problem No - 3
On 15th September 2014, the premises and stock of a firm was destroyed by fire,
but the accounting records were saved from which the following particulars are
available:

▹ Stock on 1.4.2013 - 73,500

▹ Stock on 31.3.2014 - 81,900
▹ Purchases for the year 2013-14 - 3,98,000
▹ Sales for the year 2013-14 - 4,87,000
▹ Purchases from 1.4.2014 to 15.9.2014 - 1,62,000
▹ Sales from 1.4.2014 to 15.9.2014 - 2,31,200
▹ The stock salvaged was ₹ 5,300.
Show the amount of claim. 16
 Problem No - 4
A fire accident occurred in the shop of Mahadevappa on 15.12.2014. Calculate the loss from
fire and the claim to be made with the insurance company.
• Stock on hand on 01.04.2013 – Rs.30,600
• Purchases from 01.04.2013-31.03.2014 – Rs.1,22,000
• Sales from 01.04.2013-31.03.2014 – Rs.1,80,000
• Stock on hand on 31.03.2014 – Rs.27,000
• Purchases from 01.04.2014-14.12.2014 – Rs.1,47,000
• Sales from 01.04.2014-14.12.2014 – Rs.1,50,000
Mahadevappa had always valued the stocks on hand at 90% of cost price. Goods worth
Rs.18,000 had been salvaged from fire. He had taken an insurance policy of Rs.63,000 on the
goods . Average clause is applicable on the insurance.
17
 Problem No - 5
Fire occurred in the premises of Bad Luck Traders on 1.7.2014 and a considerable part of stock was destroyed. Stock salvaged was ₹
56,000. Fire insurance policy for ₹ 3,42,000 was taken to cover the loss of stock by fire. You are required to ascertain the insurance
claim which the company should claim from the insurance company for the loss of stock by the fire from the following particulars.
Purchases for the year 2013-14 - ₹ 18,76,000
Sales for the year 2013-14 - ₹ 23,20,000
Purchases from 1.4.2014 to the date of fire - ₹ 3,64,000
Sales from 1.4.2014 to the date of fire - ₹ 4,80,000
Stock on 1.4.2013 - ₹ 2,88,000
Stock on 31.3.2014 - ₹ 4,84,000
Wages paid during 2013-14 - ₹ 2,00,000
Wages paid during 1.4.2014 to the date of fire - ₹ 36,000.
Fire also broke out on 31.03.2014 and destroyed stock of estimated cost of ₹ 1,00,000.
There was a practice in the concern to value. Stock at cost less 10% but all of a sudden this practice was changed and stock on
31.03.2014 was valued at cost plus 10%.
18
 Problem No - 6
a large portion of the records and stock of a trading concern was due to a fire accident on 15.7.2014.
Later, goods worth ₹ 8,000 and some records were salvaged from the fire. The following details are
available from these records:

Period 2009-10 2010-11 2011-12 2012-13 2013-14

           
Sales (₹) 8,60,000 7,10,000 6,00,000 5,50,000 4,80,000
           
Gross          
Profit (₹) 2,15,000 2,13,000 2,00,000 1,87,000 1,60,000

On 31.3.2014, the stock was valued at ₹ 97,000. From 1.4.2014 to the date of fire, purchases, sales
and wages were ₹ 75,000, ₹ 1,59,000 and ₹ 30,000 respectively.
Prepare a statement of claim to be submitted to the Insurance Company.
19
 Problem No - 7
A fire on October 1, 2014, destroyed the stock of a firm. The business records were saved and
from them the following particulars were ascertained:
Stock at cost on April 1, 2013 – 44,300
Stock at cost on April 1, 2014 – 37,550
Purchase for the year to 31st March 2014 – 1,03,850
Sales for the year to 31st March 2014 – 1,52,500
Purchase from April 1, 2014 to September 30, 2014 – 37,350
Sales from April 1, 2014 to September 30, 2014 – 59,000
In valuing the stock on 31-3-2014 Rs 800 had been written off a particular line of goods
which had originally cost at Rs 1,800 and which were sold in June 2014 for Rs. 1,750. Except
as regards this transaction, the ratio of gross profit had remained unchanged throughout. The
value of the stock salvaged from the fire was Rs. 5,100. Calculate the amount of claim.
20
 Problem No - 8
A fire on July 1, 2014 destroyed the stock of a firm. The business records were saved and from them the following
particulars were ascertained:
Stock at cost on April 1, 2013 – 73,500
Stock at cost on April 1, 2014 – 79,600
Purchase for the year to 31st March 2014 – 3,98,000
Sales for the year to 31st March 2014 – 4,87,000
Purchase from April 1, 2014 to June 30, 2014 – 1,62,000
Sales from April 1, 2014 to June 30, 2014 – 2,3,1200
In valuing the stock on 31-3-2014 Rs 2,300 had been written off a particular line of goods which had originally cost at
Rs 6,900. A portion of these goods were sold in June 2014 at a loss of Rs 250 on original cost of Rs 3,450. The balance
of this stock was now estimated to be worth its original cost. Subjects to the above exception, gross profit had remained
at a uniform rate throughout year.
The value of stock salvaged was Rs. 5,800. The policy was for Rs 50,000 and was subject to the average clause.
Calculate amount of claim. 21
 Problem No - 7
The Premises and Stock of Gulab Jam were totally destroyed by fire on 30.4.2014 from the books and
other records that were saved the following information is available.
The stock on hand has always been valued at 10% less than cost.

Particulars 2011-12 2012-13 2013-14 2014-15

Opening stock as valued 27,090 32,400 36,000 36,900
Purchases less returns 74,900 80,000 81,000 6,000
Sales less returns 1,20,000 1,32,000 1,40,000 12,000
Wages 17,400 19,000 20,900 2,000
Closing stock as valued 32,400 36,000 36,900

Prepare a statement for submission to the Insurance Company in support of company for loss of stock.

22