Blog Question – Accumulated Stocks

Dollar Gold Coin HubcapToday’s question comes from Singapore.

A quick question on Accumulated Stock Loss if I may Allan.

According to my understanding, normally. if the Insured mitigates their GP (gross profit) loss completely, as a result of accumulated stock, then the Insured would not be able claim for a GP loss, but I believe, the Insured is entitle to claim for ICW (increase in cost of working)  to produce the stock to the original level prior to date of loss, only if the costs are incurred beyond the normal costs (such as overtime) during the indemnity period or if the costs are incurred after the maximum indemnity period. 

Am I interpreting it correctly ? 

I look forward to catching up while you are in Singapore next week.


Dan [surname and email provided]


Hi Dan,

Both at Common Law (see City Tailors Ltd. v Evans (1921)[1]) and, as an expressed Condition applying to Section 2 in most policies, the Insured is required to mitigate its loss. Where the Insured carries extra stock that is undamaged in the incident, this can involve the depletion of stock on hand to maintain sales. How this comes about is the Insured continues to make sales using their stock on hand which, due to the disruption, the Insured is unable to replace or, if it is able to replace the stock, this replenishment is not completed to the point where the level of stock has reached its pre-loss levels before the end of the Indemnity Period. By using some or all of their stock on hand, the Insured reduces their loss of Gross Profit by maintaining revenue (sales).

With a reduction in their stock level, this may mean that the Insured will suffer a loss in the future. This could simply be that the Insured does not have the stock to sell, or they may incur increased costs of working to replenish the stock. Let us take an example. The Insured makes gold $ coin stylised hubcaps for a major motor vehicle producer. The hubcap company has a blow-moulding machine that forms the hubcaps. This unit catches fire and it takes 12 months to replace the machine from the United States. The Insured started producing hubcaps about 3 months before the car manufacturer started their production, as the Insured wanted a stockpile in case they ever had a strike or some other problem that may affect their customer (the car manufacturer) and, therefore, jeopardise the business relationship. It was a form of risk management to the hubcap company that proved invaluable when the blow-moulding machine caught fire. While using up this 3-month supply, the Insured is able to negotiate the temporary outsourcing of the hubcaps to a competitor so that the customer is not lost.

Let us assume that once the motor vehicle manufacturer started, the Insured’s production capacity on hubcaps equalled their customer’s capacity to make cars. After the new blow-moulding machine arrives, the Insured recommences production which, due to the fact that the Insured purchased the same machine as before, he can only produce the same number of hubcaps per day as the car manufacturer. This means the Insured is not able to make up the stockpile during normal production hours.

The combination of using up the entire stockpile and outsourcing, has reduced the loss of turnover during the entire Indemnity Period. However, clearly the Insured has not been fully indemnified. As we have discussed, an easy way to determine if an Insured has been indemnified is to ask the question: “Has the Insured been put in the same position, as near as money will allow, to the position they would have enjoyed if the loss had not occurred?”[2]. In this example, clearly the Insured has not. They no longer have their stockpile of manufactured hubcaps, which they were retaining as a risk management measure.

Several alternatives are possibly available to the Insured. They may:

(a)        Be able to make up the stockpile during business hours. Say, the motor company has an extended strike or sales are down, and they reduce production to four days a week.

(b)        Engage the company that assisted them during the Indemnity Period to make an additional 3 months’ supply of stock when the Insured is back into full production, to replenish their stockpile.

(c)        Have their staff work overtime and build up the stockpile over a long period, but at a cost (the overtime component)

(d)        Not replace the stockpile and incur a loss at some future time, possibly from an uninsured circumstance such as a strike by their labour force.

Clearly in all but the first scenario a loss will occur outside the Indemnity Period, but the benefit to the Insurer occurred during the Indemnity Period. Marks and Morgan (1991)[3] state that “the Insured could be disadvantaged without this clause”. Cloughton (1999)[4] who took over as author of Riley on Business Interruption Insurance, states that the clause is unnecessary in view of the principle of indemnity. While I agree with Riley, for it was his view originally, I feel that the sub-clause again puts the issue beyond doubt and with the toughening attitude of loss adjusters and claims officers in many companies, it is preferable that the accumulated stocks clause is included in the policy wording.

For the Insured to be entitled to make a claim under this sub-clause, it is not sufficient to show that accumulated stocks have been used. It could be as in scenario (a) above, that the Insured would not incur any loss. It is, therefore, necessary to show that a loss of sales has occurred (or will inevitably occur), even though this loss of sales falls outside the Indemnity Period, or that the Insured will incur additional operating costs to avoid such a loss. In either case, the sub-clause requires that an equitable allowance be made.

What exactly is an equitable allowance? This depends on the circumstances of the particular claim. Where the stocks can be replaced in time to prevent a loss of sales, such as in scenarios (b) and (c) above, or where other steps can be taken to mitigate the loss, the equitable allowance would be the additional costs incurred subject to the Economic Limit test. Where the stocks cannot be replaced in time to prevent a loss of sales, the equitable allowance would reflect the amount of the claim, which the Insured has forestalled by using their accumulated stocks.

In this Mark IV wording and the traditional Consequential Loss policies, the cover is limited to the “accumulated stocks of finished goods. However, appreciating that there are cases where Turnover is able to be temporarily maintained due to the use of accumulated stocks of raw materials or work in progress, the Mark V policy simply refers to “accumulated stocks”.

I hope this helps and I am happy to discuss it further if you wish when we catch up Tuesday week.



[1]     City Tailors Ltd. v Evans (1921) 91 LJKB 379.

[2]     As quoted in Manning A., 2005, Business Interruption Insurance & Claims:A Practical Guide, 4th Edition, Mannings of Melbourne, Camberwell.

[3]     Marks F. and Morgan T., 1991, Guide to the 1990 ISR Advisory Policy Wording, Dunhill Madden Butler & Robins GAB, Sydney, p58.

[4]     Cloughton D., 1999, Riley on Business Interruption Insurance, 8th Edition, Sweet & Maxwell Limited, London.


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