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Flashcards in Ch 9 Deck (50)
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1
Q

How does a BPP handle personal property coverage?

A

extends coverage to “furniture and fixture; machinery and equipment; stock .. and supplies used in packing or shipping.

Direct physical loss is covered unless excluded or on a specified-perils basis.

Stock is generally valued at ACV but can be endorsed for rc. Usually has coinsurance clause. Covers personal property of others but with strict limitations.

2
Q

What is the difference in insurable interest requirements between a BPP and BOP?

A

BPP: “your business personal property” For non-owned property it covers personal property of others in the insured’s care, custody, or control and located in or on the described building. Property is covered regardless of liability.
BOP: business personal property owned by the insured. For non-owned property, it covers property held by the insured and belonging to others, but not exceeding the amount for which the insured is legally liabile, including the labor value, materials, and charges furnished, performed, or incurred by the insured.

3
Q

How is ACV determined for merchandise?

A

Difficult because no policy defines ACV. It can equal rc when no depreciation.

4
Q

How is replacement cost determined for merchandise?

A

Cost to buy stock from its suppliers, less any trade discounts on allowances, plus incoming freight. It can also include the cost of receiving , opening, tagging, marking, and arranging the goods in the insured’s people are muses by the supplier. It is easy to determine replacement cost if the adjuster has access to the insured’s books and records, such as invoices. It

5
Q

What information does a business’s books, records, and financial statements contain?

A

Income statement: gross revenue, net profit before taxes, over time.

Balance sheet: values on a stated date of all assets, liabilities, and paid-in capital. Has a physical inventory figure.

6
Q

A retailer started the year with an inventory of $52,500. Purchases to inventory were $110,000. The ending inventory was worth $50,000.Calculate the cost of good sold.

A

$52,500 + $110,000 = $162,500 available for sale - $50,000 ending inventory = $112,500 cost of goods sold.

7
Q

Calculate the book value of remaining inventory on a date of loss using books and records.
Last inventory 12/31/2014 (income statement): $46,000
Net purchases $140,000
Cost of Good Sold (net sales, same period): $215,000
36.75% cost-to-sales ratio

A

Available for sale: $46,000 (carry over) + $140,000 added = $186,000
Cost of goods sold (from income statement): Net sales $215,000 * .3675 (gross profit) = $79,012
Net sales $215k- profit $79012 = $135,987 cost of goods sold for the year
Amount that could have been sold $186,000 - amount actually sold $135,987 = $50,013

8
Q

What does a salvor do?

A

Assist the adjuster in surveying the loss scene. Give immediate advice on protecting remaining merchandise, minimizing further damage, and determining the feasibility of a physical inventory y. Separates damaged and u damaged goods, conducts inventory, and checks invoice. Can also give confidential and professional advise on merchandise’s degree of damage.

9
Q

Explain the operation of salvage contracts.

A

Salvage contracts give the salvor permission to remove merchandise from the premises.

10
Q

What is the purpose of a reporting form policy?

A

Provides maximum dollar coverage when it is needed. Good for businesses with fluctuating inventories.

11
Q

How does a reporting form policy work?

A
  • provisional amount of insurance is designated when written. That is the max limit.
  • insured must report total values on hand at each of the designated reporting times during the policy term. Must be reported within 30 days of the end of any designated reporting period.
12
Q

What procedures should an adjuster follow and what information needs to be gathered in the adjustment of a loss to a small quantity of merchandise?

A

Try to establish the accurate measure of the insured’s actual loss (without salvors or accountants) and apply policy conditions to conclude.

13
Q

Why are percentage damage settlements of merchandise losses advantageous to both the insured and insurer?

A

Merchandise damaged but salable is worth more to the insured than anyone else. They only have to move it within the store and reprice to have a fire sale.

14
Q

What is the meaning of “stock” in BPP form and how is stock valued?

A

Stock means merchandise held in storage or for sale. It is typically valued at ACV but can be valued at RC if the policy is modified. Stock that is sold but not delivered is valued at selling price less discounts and expenses.

15
Q

How does insurable interest affect the adjustment of a merchandise claim?

A

Both policies (BPP and BOP) pay only for the insured’s financial interest in the covered property. The adjuster would have to separate any merchandise not owned by the insured merchandise in a leased camera department. The adjuster also has to look at the contract between the insured and the manufacturer/distributor to determine who has responsibility for the loss.

16
Q

How does freight affect replacement cost for a merchant?

A

If freight charges are paid by the merchant, they are included in the replacement cost. Otherwise, they are not.

17
Q

How do trade discounts and allowances affect replacement cost for a merchant?

A

They reduce the cost of the goods to the merchant and will reduce the replacement cost.

18
Q

How do handling costs affect replacement cost for a merchant?

A

If identifiable from the merchant’s records, handling costs increase the replacement cost of the goods.

19
Q

What might cause depreciation to stock in a merchant’s hands?

A

Physical damage (handling, moisture, poor storage conditions) or obsolescence (fashion or technology changes)

20
Q

According to the retail method of accounting, how do markdowns affect the value of merchandise?

A

The cost value of merchandise is adjusted in proportion to its retail selling price. Any markdown in the retail selling price would reduce the cost value in the same percentage.

21
Q

out-of-sight merchandise

A

Damaged beyond recognition.

22
Q

How can the adjuster verify the quantity of damaged “out of sight” merchandise?

A

Measure the quantity of merchandise claimed to have fit in the area where it is alleged to have been stored or located. Can also review the books and records to quantify.

23
Q

Why is it necessary to determine the book value of inventory when adjusting a merchandise loss?

A

Purchases to inventory worth $1,000 are not the same as retail sales of $1,000. The value of stock is not usually the selling price; it is the cost to the business of replacing stock. If you subtract ending inventory from beginning + additions you can get the value of out-of-sight inventory.

24
Q

cost of goods sold

A

An expense representing the cost of merchandise sold to customers during the period.

25
Q

cost of sales

A

Income statement value that represents the cost to the company of merchandise sold or services provided during the year. (The inventory at the beginning of the period adjusted for all purchases made during the period, less those goods on hand at the end of the period.)

26
Q

What is the significance of the cost-to-sales ratio for determining the value of merchandise lost out-of-site?

A

You can determine the value of inventory sold since the last physical count by applying the cost-to-sales ratio to the retail value of sales. This gives you the cost value of items sold.

27
Q

What should an adjuster do if an insured’s records have been destroyed?

A

Can recreate the records using info from the insured’s accountant, bank statements, supplier records,and tax returns.

28
Q

Why might perpetual inventories be inaccurate?

A

Errors can occur in recording or failing to record information. Shrinkage will occur it cannot be recorded or identified.

29
Q

perpetual inventory

A

A method of continuously tracking inventory that may not have been reconciled to the actual physical inventory.

30
Q

Identify the elements that contribute to shrinkage.

A

Petty theft, breakage, unrecorded sales, mishaps.

31
Q

How does a salvor’s role in a merchandise loss differ from the adjuster’s role?

A

A salvor protects inventory and will sell inventory, if necessary. The salvor shouldn’t determine coverage issues or settlement amounts.

32
Q

Can salvage be sold before the adjuster and insured have agreed on a settlement? Explain.

A

Yes. Some items need to be sold quickly before value is lost. Salvage is sold “on account of whom it may concern.”

33
Q

Regarding salvage proceeds, why should an adjuster be familiar with the law in the jurisdiction of the claim?

A

The insurer may be entitled to first-dollar recovery on salvage, regardless of coinsurance.

34
Q

Describe the “sale on account of whom it may concern” method of accounting for salvage sale proceeds.

A

Salvage sale is made before agreement is reached on the value of the stock. Net proceeds are held by salvor. When claim is settled, the insurer is given the proceeds and the insurer pays the difference.

35
Q

Why might an insured deliberately underreport values?

A

The insurer may want to be a coinsurer to reduce premium.

36
Q

Explain how an insurer’s payments are affected under a value reporting form when a merchant underreports values.

A

The insurer pays the proportion of the loss no higher than the proportion of reported values to actual sales as of the report date.

37
Q

Explain how an insurer’s payments are affected under a value reporting form when a merchant reports late or not at all.

A

Coverage is limited to the value stated in the last report. If no report was ever filed, the insurer pays no more than 75% of the amount that otherwise would have been paid.

38
Q

Describe an adjuster’s activities on an initial visit when damage to merchandise is severe and widespread but not total.

A

On the first visit, the adjuster should inspect the premises, taking photos and guiding the insurer.

39
Q

What role might a salvor play in a percentage damage settlement?

A

A salvor can advise the adjuster as to the likely percentage proceeds that would be realized if the stock is taken for full value and sold for salvage. Because this is the adjuster’s alternative to a percentage damage settlement, this advice is crucial to determining how much to allow in a percentage damage settlement.

40
Q

Identify the benefits of a physical inventory of damaged merchandise.

A

Can give an estimate of out-of-sight loss. (Subtract inventory of remaining merchandise from the book inventory)

Can also give info on pre-loss obsolescence.

41
Q

Identify the purpose of an adjuster’s questioning an insured about its marketing and merchandising methods.

A

Can get insight on how the business operates and can get some ideas on how to prepare the claim file.

42
Q

Explain why merchandise that is damaged but still salable at the retail level is almost certainly worth more to the insured than to anyone else. P

A

If the insurer keeps it for a fire sale, they only have to move it within the store and reprice it.

The alternative is for a purchaser to pack, move, unpack, classify, reprice.

43
Q

How does the BPP handle stock that a merchant sold but hasn’t delivered?

A

Provides reimbursement of “selling price less discounts and expenses you otherwise would have had.” U

44
Q

How does a BOP handle personal property coverage?

A

Similar to BPP but definition of “business personal property” isn’t as detailed. Coverage extends to all likely exposures, including owned property, property of others, and improvements and betterments.

45
Q

What are the two BOP policies?

A

Standard - specified perils at rc and Special - direct physical loss unless excluded - rc. The y also have a seasonal automatic increase clause (25% .. if 100% of avg. monthly value during 12 preceding mos). No coinsurance clause.

46
Q
$25l specific insurance available, 80% co insurance 
$175k reporting form limit. 
Last reported value $170k
Value on dol $180k
Agreed loss $26k 

Calculate payments

A

Specific insurance $25k / ($180k x .8) x $26k = $4514

Balance from reporting form insurer = $21,486

47
Q

Adjuster Tim, and insured James agreed on James’ business merchandise’s full value of $100,000. Under the “sale on the account of the insurer” method of handling salvage proceeds, if the salvage net proceeds to the insurer are $35,000, the insurer’s net payment is

A

$100,000 - $35,000 = $65,000

48
Q

Albert covers his property with a reporting form and he also has $25,000 of specific coverage with an 80 percent coinsurance requirement. Albert has reported values on time and accurately. The amount of coverage on the reporting form is $175,000. Albert reported a value of $173,000 on July 31. The actual value on 7/31 was $170,000 and on the date of the loss, 9/1, the value was $180,000. The agreed loss is $26,000. How much, if any, of the $26,000 will be paid under specific insurance?

A

$25,000 specific insurance divided by (.80 * 180,000) = $25,000 divided by $144,000 = .1736 x $26,000 loss = $4,514

49
Q
Jack owns a business and his income statement contains the following information:
Gross sales$120,000
Bad debts $500
Returns and allowances $3,000
Cost of goods sold $74,000
Gross profit $43,000
Miscellaneous expenses $38,500

What is Jack’s net income from his business?

A

Gross Profit $43,000 - expenses $38,500 = $4,500 net income

50
Q

Ben’s gross sale of canoes on December 31 was $240,000. His net sales were $234,000. Ben’s cost of canoes sold is $148,000. What is the gross profit on Ben’s canoe sales?

A

net sales $234,000- cost of goods $148,000 = $86,000