Accounts Of Insurance Companies

In order to provide some coverage for the risk exposure of the business especially from fire a businessman takes an insurance policy. Usually two types of losses are covered under the policy.

• loss of stock, plant, buildings etc. and
• loss of profits due to dislocation of the business.

A fire insurance policy compensates the insured for any loss that he may suffer on account of loss of stock due to fire inconsideration of a certain amount being paid as premium. The value of stock lost on account of fire can be determined by finding out the value of stock on the date of fire less the value of the salvaged stock.

The value of stock can also be ascertained by compiling a Memorandum Trading Account wherein balancing figure will be value of stock.  Factors determining amount of claim.

• Rate of Gross profit: The rate of gross profit is determined on the basis of the performance of the business during the preceding 3-4 years. Abnormal factors during the same period are eliminated. If gross profit percent reflects a definite trend weighted average method is employed for finding the average gross profit.
• Average clause: The insurance company in order to discourage under-insurance limits its liability to the proportion of the actual amount of loss which the insured amount bears to the actual value of the property e.g.. stock work Rs. 1,00,000 is insured only for Rs.80,000 and if the loss amount to Rs.10,000, the claim will be

= Amount of Loss × (Amount of Policy ÷ Actual value of stock)

= 20,000 × (80,000 ÷ 1,00,000) = Rs.16, 000

The average clause is applicable only if it is proved that the loss sustained by the insured is less than the sum insured. However, when the loss is more than the sum insured, the insured can recover the whole amount in spite of the average clause.