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

Under an insurance policy for stock with an average clause, the insured's claim for loss is reduced proportionately when:

The claim is proportionately reduced when the policy amount is less than the stock's value at the date of fire, meaning underinsurance. The insured then bears part of the loss, and the insurer pays only in the ratio of policy amount to stock value.

  1. Athe policy amount is less than the value of stock at the date of fireCorrect
  2. Bthe policy amount exceeds the value of stock at the date of fire
  3. Csalvage is recovered from the damaged goods
  4. Dthe stock was valued at cost rather than selling price

Explanation

The average clause penalises underinsurance: claim = loss × policy amount / stock value, applying only when the policy amount is lower. Overinsurance never yields more than the actual loss, and salvage is deducted separately.

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