Question

Should a liability be recorded for risk of loss due to lack of insurance coverage? Discuss.

Short answer

No, liability should not be recorded for the risk of loss due to lack of insurance coverage. It is because lack of insurance is not enough to be considered as a medium for recording a liability; other factors are also taken into consideration.

Step-by-step solution

Meaning of Insurance Coverage

Insurance coverage is the risk covered by a person through insurance services. Insurance cover assists an individual by safeguarding themselves from unavoidable circumstances.

Reason for not recording a liability for risk of loss due to insurance coverage

The lack of insurance doesn’t imply that a liability has occurred at the time of financial statements. When an event indicates that there is a loss or damage of the property of others, then contingency occurs. Until and unless any damage occurs, the value of the property does not decrease. Therefore, anticipated future injury, loss, or damage arising from lack of insurance should not be recorded without any occurrence of the contingency. However, a contingency takes place if an uninsurable situation results in probable loss occurs.

Hence, lack of insurance is an insufficient ground for recording a liability.