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

Stock of Rs 8,00,000 (at cost) was on hand when a fire occurred at the godown of Iyer & Co. Stock worth Rs 2,00,000 was saved. The stock was insured for Rs 4,00,000 under a policy with an average clause. What is the amount of claim?

The claim is Rs 3,00,000. The net loss is Rs 6,00,000, but the policy covers only half the stock value (Rs 4,00,000 against Rs 8,00,000). Under the average clause the insurer pays the same proportion of the loss, so one half of Rs 6,00,000.

  1. ARs 4,00,000
  2. BRs 6,00,000
  3. CRs 3,00,000Correct
  4. DRs 2,00,000

Explanation

Loss = 8,00,000 - 2,00,000 = 6,00,000. Because the policy (4,00,000) is less than the stock value (8,00,000), the average clause gives claim = 6,00,000 x 4,00,000/8,00,000 = 3,00,000. Rs 4,00,000 wrongly applies only the policy cap without the proportion.

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