Problem on loss of profit policy in case of insurance claims

1. Haribhai V. Desai College, Pune 411002
Department of Commerce
E- Content Development Cell
Third Year B. Com.
Insurance Claim Accounting (Loss of Profit Claims)
Designed by Dr. Yashodhan Mithare

2. Problem on ‘Loss of Profit Policy’
Learning Objectives :-
1. To understand concept of ‘Short Sales’
2. To understand the calculation of Gross profit Ratio
3. To understand the application of ‘Average Clause’
4. To understand calculation of final claim amount
Problem Steps Short Sales GP Rate Loss of Profit Cover Required Average Clause

3. From the following particulars, calculate the amount of claim
under ‘Loss of Profit’ Policy.
Date of Fire 1 April 2014
Financial Year ends on 31 December
Period of indemnity 4 Months
Policy Amount ₹ 300000
Sales from 1.1.2013 to 31.12.2013 ₹ 18,00,000
Sales from 1.4.2013 to 31.3.2014 ₹ 20,00,000
Net Profit for the year 2013 ₹ 2,00,000
Standing charges for the year 2013 ₹ 1,60,000
Sales during the dislocation Period ₹ 2,00,000
Sales during the corresponding Period ₹ 6,00,000
Problem Steps Short Sales GP Rate Loss of Profit Cover Required Average Clause

4. Information Received
“Due to fire, my Profit is Lost”
Questions to be asked
What is the amount
of sales lost?
How much profit you
earn ?
How much is your
loss of profit?
How much insurance
Cover you took?
Insurance was under
insurance or over
insurance ?
Calculate Short Sales
Calculate Gross Profit
Rate
Calculate Loss of
Profit
Calculate Insurance
Cover required
Apply Average Clause

5. Steps to be taken
Calculation
of
Short Sales
1
Calculation
of
Gross Profit
Rate
2
Calculation
of
Loss of
Profit on
Sales
3
Calculation
of
Insurance
Cover
Required
4
Calculation
of Average
Clause
5
Problem Steps Short Sales GP Rate Loss of Profit Cover Required Average Clause

6. Calculation
of
Short Sales
1
Short Sales
Sales during the corresponding period (-) Sales in the Dislocation Period
Sales during the Corresponding Period
(1.4.2013 to 31.7.2013)
600000
(-) Sales during the dislocation Period
(1.4.2014 to 31.7.2014)
200000
SHORT SALES 400000
Short Sales is the amount of sales which the firm could not achieve due to fire
Problem Steps Short Sales GP Rate Loss of Profit Cover Required Average Clause

7. Calculation
of
Gross Profit
Rate
2
We need to calculate Gross Profit rate of Last year in order to ascertain
the loss of profit
Net profit + Insured Standing Charges
Sales in the previous Financial Year
X 100
200000 + 160000
1800000
X 100
20 %
The firm earns a profit of 20 % on sales
Problem Steps Short Sales GP Rate Loss of Profit Cover Required Average Clause

8. Calculation
of
Loss of
Profit on
Sales
3
We need to calculate Loss of Profit on Short Sales
Loss of Profit = Short Sales X Gross Profit Rate
Loss of Profit = 400000 X 20%
Loss of Profit = ₹ 80000
The firm has lost a profit of ₹80000 due to fire
Problem Steps Short Sales GP Rate Loss of Profit Cover Required Average Clause

9. Calculation
of
Insurance
Cover
Required
4
Insurance Cover Required =
Sales in the Preceding year X Gross Profit rate
Insurance Cover Required =
₹ 20,00,000 X 20 %
₹ 400000
The company should have taken a cover of
₹ 400000; but it actually took a cover of ₹
300000 only. Hence, It’s a case of under
insurance
Problem Steps Short Sales GP Rate Loss of Profit Cover Required Average Clause

10. Calculation
of Average
Clause
5
As it is a case of Under Insurance, Average Clause
becomes applicable
Amount of Policy taken
Insurance Cover Required
X Loss of profit
300000
400000
X 80000
= ₹ 60000
Amount of claim to be lodged with the insurance
company is ₹ 60000
Problem Steps Short Sales GP Rate Loss of Profit Cover Required Average Clause

11. Dr. Yashodhan Mithare
mithare@yashodhan.org