Understanding the Average Clause in Insurance


The average clause is a provision frequently found in insurance policies, particularly property and business interruption insurance. It acts as a safeguard for insurers, ensuring they only pay a proportional share of a claim if the insured property is undervalued at the time of loss.

In simpler terms:

  • If your insured property is worth £100,000 but you only insure it for £80,000 (undervalued), you are underinsured by 20%.
  • In the event of a total loss, the average clause would apply, and you might only receive £64,000 (80% of the £80,000 insured value) instead of the full £100,000.

The average clause essentially penalizes underinsurance by reducing the claim payout based on the degree of underinsurance. This incentivizes policyholders to accurately value their possessions and obtain sufficient coverage to avoid financial hardship in case of a claim.

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Here’s why the average clause exists:

  • Fairness:

Insurers base premiums on the perceived risk, which is directly linked to the value of the insured property. By underinsuring, you pay a lower premium despite the full risk remaining. The average clause ensures the insurer isn’t left paying for a risk they weren’t adequately compensated for.

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  • Accuracy:

The average clause encourages policyholders to accurately value their belongings, promoting transparency and preventing moral hazard (where someone might be incentivized to have a loss occur).

It’s crucial to remember:

  • Firstly, the average clause only applies when the actual value of the property is higher than the insured value.
  • Secondly, carefully review your policy wording to understand if the average clause applies and how it might impact your claim payout.
  • Finally, to avoid underinsurance and potential financial loss, consult with your insurance provider to ensure your property is accurately valued and adequately covered.

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Understanding the average clause, you can make informed decisions about your insurance coverage. Ensuring you protect yourself from unexpected financial burdens in the event of a loss.


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