Insurance Policies and the Average Clause

We hate it when anyone loses out on their insurance claim. During a single fortnight recently, two Policyholders we’re acquainted with lost large amounts — and the cause in both cases was the Average Clause in the Insurance Policy.

These people had £50,000 and £135,000 docked from their pay-outs — and not because the Loss Adjuster was being at all devious. It was because they hadn’t realised they needed to keep their policies up to date over the years, in particular updating the value of their properties. They’d simply renewed the policy as if the value hadn’t changed.

This is where the Average Clause comes in.

When you insure your assets, such as your home, one of the pieces of information you supply to the Insurer is the “insurance value”. This becomes the sum insured under your policy and the basis for calculating your Insurance Premium.

If the insurance value on your policy is lower than the actual value when you come to make an insurance claim, you won’t have paid enough on your premiums to cover the full value. Not unreasonably, Insurers are unwilling to cover the extra costs.

The Condition of Average

The Condition of Average is inserted into insurance policies to protect Insurers from this situation. Put most simply, it says that, for instance, if you’ve only declared 50% of the insurance value, you’ve only paid 50% of the premiums and the Loss Adjuster will thus only allow 50% of your claim.

To take an example, if the insurance policy covering a building is for £50,000 and the actual insurance value at the time of loss is £100,000, the proportion of Average will be just 50%. That means that, whether the loss is minor or total, you’ll only receive 50% of any claim you make.

In this situation, if you were claiming £50,000, with an excess of £250, the calculation would be:

  • 50% Average of a £50,000 claim = £25,000
  • Less policy excess of £250 = £24,750 pay-out
  • Total loss on £50,000 claim = £25,250

A loss of this size could be devastating, so if you’re unsure whether you’re up to date under the Average Clause, consult your insurance broker as soon as possible. Or you’re very welcome to get in touch with us for a chat about it.

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