by Fire insurance protects businesses from losses caused by fire-related incidents. When a fire occurs, the insured party files a claim to recover the loss suffered. Ascertainment of a fire insurance claim involves determining the exact amount of financial loss due to the fire and the amount that the insurance company is liable to pay. This process follows detailed accounting procedures and legal principles, especially when abnormal lines of goods (non-standard or specialty goods) are involved.
Key Steps in Ascertainment of Fire Insurance Claims:
Step 1. Determining Gross Profit Rate
To calculate the claim, first, the gross profit rate must be determined. Gross profit is the difference between sales and the cost of sales. The past year’s trading account or average of several years is analyzed to find the standard gross profit percentage. This percentage helps in estimating the gross profit lost due to the fire. Accurate calculation of this rate is crucial as it forms the base for many claim components.
Step 2. Calculating Turnover Lost Due to Fire
The next step is identifying the turnover lost because of the fire. This is done by comparing the turnover of the period affected by the fire with the corresponding period in the previous year. Adjustments are made for trends, seasonal fluctuations, or any abnormal circumstances (e.g., economic downturns or special promotions) to ensure a fair estimate of what sales would have been without the fire.
Step 3. Calculating Gross Profit Lost
Gross profit lost is calculated by applying the gross profit rate to the turnover lost due to fire. This represents the profit the business would have earned had the fire not occurred. For example, if turnover lost is ₹500,000 and the gross profit rate is 20%, the gross profit lost equals ₹100,000. This figure forms the core of the claim calculation.
Step 4. Adding Increased Cost of Working
Sometimes, businesses incur additional expenses to continue operations after the fire (e.g., renting temporary premises or outsourcing production). These are known as increased costs of working. Insurers allow the lower of:
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The actual additional expenses, or
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Gross profit saved (turnover maintained due to extra expenses × gross profit rate).
This ensures businesses are compensated fairly without creating profit from the claim.
Step 5. Adjusting for Savings in Expenses
During a shutdown or slowdown caused by fire, some expenses (like utilities, wages for non-working staff, or advertising) may be saved. These savings are deducted from the gross profit loss and increased costs of working because the insurance policy compensates only the net loss, not the gross figures.
Step 6. Calculating Total Claimable Amount
The total claimable amount is:
Gross profit lost + admissible increased cost of working – savings in expenses.
This figure is compared against the policy’s sum insured. If underinsurance exists (i.e., sum insured < gross profit that should have been insured), the claim is proportionally reduced using the average clause.
Special Considerations for Abnormal Line of Goods:
- Understanding Abnormal Line of Goods
Abnormal lines of goods refer to non-standard or specialty items that a business deals with alongside its main products. Examples include custom-made products, seasonal goods, luxury collections, or experimental inventory. These goods often carry unique costs, profit margins, and sales patterns, making their valuation for insurance claims more complex.
- Assessing Stock Value Accurately
The value of abnormal goods must be determined carefully using actual cost or market value, whichever is lower. Standard valuation methods may not apply if the goods are not regularly traded or have limited market demand. Expert valuation or detailed inventory records are often required to substantiate the claim.
- Special Gross Profit Rate for Abnormal Goods
The gross profit rate for abnormal goods may differ from regular items. For instance, luxury items might carry a higher gross profit margin, while experimental products might generate little to no profit. Businesses must separate the gross profit rates of abnormal goods from regular goods to ensure the insurance claim reflects actual business losses.
- Turnover Analysis for Abnormal Goods
Since abnormal goods may not sell regularly, historical turnover data may be insufficient. Adjustments should be made for expected sales, past special orders, or forecasted demand. Detailed business records and market analysis support the estimate of lost turnover for these items, strengthening the claim’s credibility.
- Calculating Increased Costs of Working for Abnormal Goods
If the business takes special steps to maintain the supply or production of abnormal goods (like using rare materials or specialized suppliers), these increased costs are included in the claim. However, the insurance policy usually limits admissible expenses to what is reasonable and necessary, so clear documentation is critical.
- Applying Average Clause on Abnormal Goods
The average clause applies if the abnormal goods are underinsured. For example, if the stock of abnormal goods is worth ₹500,000, but only ₹300,000 is insured, and the loss amounts to ₹200,000, the insurer pays only a proportionate amount:
(Insured amount / Actual value) × Loss = (₹300,000 / ₹500,000) × ₹200,000 = ₹120,000.
Businesses must ensure accurate valuation and adequate insurance coverage for such goods to avoid underinsurance penalties.
Example of Fire Insurance Claim with Abnormal Goods:
Imagine a firm dealing in regular garments and custom designer wear. After a fire:
- Regular goods stock loss: ₹800,000.
- Abnormal goods (designer wear) loss: ₹500,000.
- Gross profit on regular goods: 25%; on designer wear: 50%.
- Turnover lost: ₹1,200,000 (₹900,000 regular + ₹300,000 designer).
Calculations:
- Gross profit lost (regular) = ₹900,000 × 25% = ₹225,000.
- Gross profit lost (designer) = ₹300,000 × 50% = ₹150,000.
- Total gross profit lost = ₹375,000.
- Increased cost of working (approved): ₹50,000.
- Savings in expenses: ₹20,000.
- Total claim = ₹375,000 + ₹50,000 – ₹20,000 = ₹405,000.
If underinsurance applies, apply the average clause to adjust the final claim.
Documentation Required for Fire Insurance Claim:
To support the claim, businesses must provide:
- Stock records and inventory lists before the fire.
- Trading accounts showing gross profit rates.
- Sales and turnover data (past and projected).
- Detailed valuation reports, especially for abnormal goods.
- Proof of increased costs of working.
- Expense records showing savings during business interruptions.
Proper documentation not only speeds up claim settlement but also ensures the business receives fair compensation.
