Fire Insurance coverage of inventory which is lying physically but not in books of account?
In Pharmaceutical companies as per Drug and Cosmetic Act a sample of each batch is to be maintained till 5 years from the date of manufacturing and in case it is damaged, the insured has to purchase it from the market.
The pharmaceutical companies keep the samples of each batch but the cost of each sample is absorbed by the stock sold in the market. In one of the incidence, a fire broke in the godown, where the samples were lying and samples worth Rs 1.5 crs were damaged. The Insured filed a claim but the Surveyour repudiated the same on the ground that the policy is having the “Designated property Clause” and the value of this stock is not appearing in the books of accounts, as the cost of samples are absorbed in the cost of production/sales value.
Similarly in the Hotel Industry, the inventory of linens, bed sheets etc are charged to books of accounts, as an expense in the year these are purchased or issued to House Keeping. But physical inventory is available, which when damaged due to fire but the claim is repudiated on grounds stated above.
The question arises as to what precautions should be taken to insure such inventories. In my opinion, the value of inventory should be specifically mentioned, without designated property clause on the inventory.
Your suggestions/ comments are welcome.