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CMA Intermediate · Financial Accounting · Insurance Claim for Loss of Stock and Loss of Profit

Rao Industries has a loss of profit policy for Rs 3,00,000. After a fire, turnover during the indemnity period fell short of the standard turnover by Rs 2,00,000. The rate of gross profit (net profit plus insured standing charges) is 40% of turnover. The annual turnover for the last financial year was Rs 10,00,000. The policy is subject to an average clause based on annual turnover. What is the claim for loss of profit?

The claim is Rs 60,000. The profit lost on the turnover shortfall is Rs 80,000 (40% of Rs 2,00,000). The policy should have been Rs 4,00,000 (40% of annual turnover) but is Rs 3,00,000, so only three-fourths of the loss is payable.

  1. ARs 80,000
  2. BRs 1,20,000
  3. CRs 45,000
  4. DRs 60,000Correct

Explanation

Loss on shortfall = 2,00,000 x 40% = 80,000. Adequate policy amount = 10,00,000 x 40% = 4,00,000. Since the policy is only 3,00,000, the claim = 80,000 x 3,00,000/4,00,000 = 60,000. Rs 80,000 ignores the average clause.

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