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How do you treat salvaged goods in fire insurance claims

  • Author :
  • TATA AIG Team
  • Published on :
  • 15/01/2024
  • 2 min read

Fire insurance policies are, in essence, indemnity-based plans. You will only be compensated for the actual loss you have suffered. So what happens when goods have been partially destroyed or are ‘salvageable’?

How can you treat salvage in fire insurance, and what impact does it have on your fire insurance claims?

How Do You Treat Salvaged Goods in Fire Insurance Claims Settlement?

When your insured property has been damaged in a fire, insurers will take possession of it and attempt to recover as much salvage value as possible. However, in most cases, you can choose the retain these goods yourself.

If you choose to do this, then your salvage value would be the value subtracted from the value of your stock at the date of fire. The resulting amount will be your loss due to fire under your fire insurance claim.

Amount of Stock Lost = Total Value of Stock (During The Fire) - Value of Salvageable Goods

How to Calculate Your Salvage in Fire Insurance?

Here are some important factors you must take into account when determining salvage in fire and burglary insurance:

Average Clause: An average clause in fire insurance only applies when the damaged property is underinsured (the sum insured/insurance cover is less than your actual stock value). The fire insurance claim would follow the following formula:

Claim Amount = Loss of Stock x (Sum Insured / Insurable Amount)

Total Loss: If your goods are completely destroyed, your claims payout will be equal to your actual loss, provided you have fully insured your property. However, in the case of under-insurance, the payout is restricted to your policy amount.

Partial Loss: If your goods are partially destroyed, the payout amount is restricted only to the actual loss – provided your property is fully insured. In the case of under-insurance

Without Average Clause: The claim amount will be equal to the actual loss or sum insured.

With Average Clause: The claim amount will be proportionally reduced, as shown in the formula above.

Example of Calculating Salvage in a Fire Insurance Claim Settlement:

Stock as of 01-01-2001 ₹28,500
Purchases  ₹1,52,500
Manufacturing Expenses  ₹30,000
Selling Expenses ₹12,100
Administration Expenses  ₹6,000
Financial Expenses ₹4,300
Sales  ₹2,49,000

At the time of valuing stock on 31-03-2002, ₹2,500 was marked down on an item that was initially purchased for ₹20,000. It was sold during the year for ₹8,000. Excluding this transaction, the gross profit earned during the year on sales was 20%.

The final valuation of your stock will be as follows:

Stock as of 01-01-2001 ₹28,500
Subtract: Book value of the abnormal stock (10,000 - 2,500) ₹7,500
₹21,000
Add: Purchases ₹1,52,500
Manufacturing expenses ₹30,000
₹2,04,500
Subtract: Cost of Sales:
Sales ₹2,49,000
Sale of Abnormal stock ₹8,000
₹2,41,000
Subtract: Gross profit at 20% (of 2,41,000) ₹48,200
Gross profit at 20% (of 2,41,000) - 48,200 ₹1,92,800
Value of Stock (2,04,500 - 1,92,800) on 31-03-2002 ₹11,700

Wrapping Up

As evidenced in the example shown above, the value of your salvaged stock will be subtracted from your total fire insurance claim settlement.

Since fire insurance plans are indemnity-based plans, to ensure you are properly compensated, it is vital that you choose the right insurer.

Tata AIG, for example, offers a number of business insurance policies to ensure you are adequately reimbursed for your losses.

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Disclaimer / TnC

Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.

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