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This is one of a new series of technical briefings which is aimed at helping customers understand Insurance clauses that Insurers can use to reduce the value of a claim when you suffer a loss. The following is a short description of Average in an Insurance Policy, for full technical date please refer to a Chartered Insurance Institute or ABI publication.

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This is one of a new series of technical briefings which is aimed at helping customers understand Insurance clauses that Insurers can use to reduce the value of a claim when you suffer a loss. The following is a short description of Average in an Insurance Policy, for full technical date please refer to a Chartered Insurance Institute or ABI publication.

Condition of Average

When you insure your assets, like a building, you advise your Insurer of the ‘insurance value’ which then forms the sum insured under your policy. The insurer charges you an Insurance Premium based on this declared sum insured.

If you get this insurance value wrong and it is lower than the real value at risk, then your premium will be based on the wrong value and will be a lower than you should have paid to cover the property at risk.

It would not be fair on the insurer and their other customers if you received a full insurance claim if you have only paid a

part of the whole premium that should be due. To protect Insurers in this scenario, the policy contains a Condition of Average.

Simply the  Condition of Average says that if you declare an insured value that is 50% of the true value, then you have only paid 50% of the premium due and will only receive 50% of your claim.

An Example of the Condition of Average being applied in an Insurance Claim

If a policy of insurance covering a building has a sum insured of £80,000 and at the time of a loss the real insurance value is £100,000 then the proportion of Average  would be £80,000/£100,000 or 80%. You will only receive 80% of any loss you suffer.

Now consider that you suffer damage of £5,000 and there is a £250 policy excess. This means your claim would be reduced as follows:

  • Claim £5,000 x 80% Average = £4,000
  • Less policy excess: £250
  • Insurer’s payout: £3,750

Note the policy excess is deducted after the claim has been reduced by average so the impact is not watered down.

This might seem harsh, but Insurers want to encourage customers to think carefully about insurable values and declare these honestly so as to contribute a fair premium into the pool.

The Special Condition of Average

Insurers recognise that the valuation of certain property can vary during the policy period and in recognition may apply a Special Condition of Average which states that Average will only be applied if the proportion of Average (Sum Insured/Real value) falls below 75%

The Reinstatement Memorandum

Under this policy clause, commonly applied to buildings and other constructions, the allowance before which Average will be applied is only 85%

Want to know how to avoid the Condition of Average being applied? Please see our next blog post.

Need more information? Please contact us on 0845 4310 448 or email solicitors@butlerevans.co.uk

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