Have you had an insurance claim reduced because of the Average Clause being applied, this briefing will help you understand this clause and decide if you can challenge the Insurer’s decision.
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 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 payment 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 X% of the true value, then you have only paid X% of the premium due and will only receive X% 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 of premiums from which everyone’s claims are paid.
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 a certain percentage, for example 75%
The Reinstatement Memorandum
Under this policy clause, commonly applied to buildings and other fixed assets, the variation of values before which Average will be applied is commonly 85%.