The following case study demonstrates some important issues in preparing claims for damaged stock.
Mona Lisa operates a chain of women’s fashion stores trading as Da Vinci Designs. On 9 April 2006 she received a call advising her flagship store in Toorak, Victoria was in flames. Mona visited the scene to discover all that remained was a sodden, black mass of expensive couture. There was one saving grace. While all the stock in the showroom was destroyed, a quantity of recently delivered garments in a storeroom was still sealed in plastic and miraculously survived unscathed. To prevent smoke contamination Mona arranged for the garments to be collected and trucked to her warehouse for redistribution and sale in other stores.
Mona estimated the stock had a retail value in excess of $500,000. Her broker informed her it was covered by the standard Mark IV Industrial Special Risks (ISR) policy. Mona needs to submit a stock claim. How should she proceed?
Mona has already made her first mistake. She arranged for the undamaged stock to be removed without a stocktake or providing the insurer the opportunity of verifying the quantity and nature of the garments on hand. Mona must immediately contact her warehouse and ensure the goods are recorded. She then needs to contact the insurer and allow them to check the records accurately reflect the undamaged stock. Hopefully none of the stock has been transferred to alternate stores, or if so, full records have been kept.
It is not possible to count the damaged stock. This is unrecognisable. A stock reconstruction is required. As part of its stock control Da Vinci Designs conducts a quarterly stocktake. The last stock count was performed on 31 March 2006. The reconstruction commences with the quantities of stock on hand as at 31 March 2006 adds purchases and deducts garments sold from 1 April 2006 to the date of loss (9 April 2006). This provides the total quantity of garments in the store immediately before the fire. If Da Vinci had a perpetual inventory system which keeps track of the garments on hand at any point in time a reconstruction may have been unnecessary.
The undamaged garments need to be deducted from the reconstructed balance to determine the volumes destroyed in the fire.
The stock destroyed in the fire needs to be valued. The garments fall under Basis of Settlement Clause (b). This covers the replacement cost at the time and the place of replacement or, if the property is not replaced, the value at the time and place of the damage. The garments will be replaced with similar items. This may take time as most were imported from Italy. It may be appropriate for Mona to value the garments at original cost and submit an interim claim to be adjusted when the replacements arrive. The replacement cost may be considerably different than original cost due to availability and fluctuating exchange rates.
Unlike many other categories of property, stock is not subject to the "Reinstatement or Replacement Memoranda". This means Mona is entitled to make a claim and receive payment before the stock is physically replaced.
Mona’s stock claim was ultimately settled for replacement cost.
We can learn from Mona.
- If damaged stock cannot be counted it is imperative to count the undamaged stock.
- The insurer must be given the opportunity of verifying this.
- The Industrial Special Risks (ISR) policy covers replacement cost when the stock is replaced. This may be greater than historical cost.
- The claim needs to be submitted promptly to encourage a progress payment.
- The cover should be supplemented with cover for Consequential Loss.
Author
Published with permission of Claim Solutions Pty Ltd.
Insurance Policy
Country: - Australia
Policy Description: - Mark IV Industrial Special Risks (ISR) policy and others
Insurer: - Various
External Links
