Fire Claims > Case Study-1(A)

Declaration Clause

Under this clause the insured is regularly declaring the stocks on monthly basis:

The monthly declaration basis could be

• The average value at risk on each day of the month or
• The highest value at risk during the month shall be submitted by the insured latest by the day of the succeeding month.

If there is a loss, the declared amount (before loss) in a month prior to the loss has to be compared to the value of average stocks of each dy of the month (prior to loss)

If declared amount is less than the stock value of that month then under insurance would be applicable other wise not.

In one case the client was a MNC and was regularly declaring their stocks on PTR (Product transfer rate) to the insurance company. The loss to such stocks declared occurred due to heavy floods in Mumbai 26th July 2005.

So the surveyor checked this condition of declarations for under insurance and found that declarations for under insurance and found that declaration of prior month i.e. June 2005 was declared only on 28th July 2005 so this June declaration would be ignored for comparison and declaration of May 05 was taken and then compared with the stocks of May 05 and stocks of May 05 at PTR value were compared as on stocks of daily average of the each day of the May 05.

It was found that the stocks were under declared:

Example- May 05

Case Study -1 (B)
Valuation/Assessment of Loss Basis of Valuation

• INSURED’S “CONTENTION WAS THAT STOCKS ARE COVERED ON PTR (PRODUCT TRANSFER RATE)
  Goods are transferred from factory of the insured to godown at Bhiwandi at PTR basis and this godown is controlled by C & F Fixed commission basis)
• The policy never mentions the word PTR on its face or schedule to the policy. However insured contented that he is declaring the stocks on PTR basis.
• Fire Policy as per Surveyors is indemnity policy on cost or market value which even is low basis.
• The surveyor at the time of loss assessment contended to the insured that:
  P.T.R includes Profit because:

• They found that client is booking sales in their books on PTR basis and not on MRP.
• On analyzing the Trading P & L Account, the surveyors found that it includes net profit of 13%, so this needs to be deducted.
• Further unincurred expenses to be incurred from Bhiwandi godown to dealers:
  - Insurance
  - Freight
  Would also be reduced.
• So under declaration policy the loss can be compensated on cost basis upto the place of loss without profit.

Second Under Insurance

First under insurance is compared in declaration policy in this case for May 05
Second under insurance would be compared as under:

Value of stocks as on 26.07.05
Sum Insured under Policy

Under insurance would be there if the value of stocks is more than the sum insured. In this case the second under declaration was applicable as under”

Expiry Goods

During the course of our verifications, some expired stock was found in this Godown. Further some of the stocks were found to be on short expiry i.e. expiring on 31st July 2005, whereas the loss occurred on 26th July 2005, so we have treated such stock as deemed to expire and we disallowed the same. Further there were also some other stocks that were also nearing their expiry i.e. expiring between 1st Aug 2005 to 31st Oct 2006. In such case, we have disallowed their value proportionate to total life of medicine.

Obsolesce/Pilferage Factor

We have considered a dead stock and variation factor @ 0.5%, which is a nominal deduction only and has been applied as a loss minimization tool only following a conservative approach, which is quite reasonable since we have already deducted the value of expired stocks separately in our assessment. This deduction would be only on account of spillage/ pilferage etc. being the small amount of total stocks.

Destruction of Salvage

The insured had taken the permission for the destruction of affected stocks of medicine from the concerned authorities as the water-affected stock of medicines posed a health hazard and moreover had no salvage value, these aspects being related to the nature of these items. We then supervised the process of destruction of the complete salvage of the affected stocks at both the warehouses

Coverage

Insured had maintained their Godown in Building no 21 at Arihant Godown Complex, Koper Bus Stop, Thane – Bhiwandi Road, Bhiwandi. Dist – Thane and in this premises 26 Galas were occupied (i.e. Gala no.1 to 10 and Gala no.12 to 26). The same was observed from the copy of the lease agreement subsequently submitted by the insured. However, in the insurance policy for this location, the Gala nos. were stated as 1 to 21. Thus as per the policy there was no coverage for the Gala nos. 22 to 26 and further the insured did not occupy the Gala no.11. Hence we have duly adjusted the value of the stocks in the proportion of the area occupied and covered. The detail of computation of area is comes to 83.86% being the insured area out of the total area occupied and thus the value of stock not covered is 16.14% and the total amount of stock in the proportionate area not covered was computed.