When discussing “average” in the context of insurance, it’s crucial to understand that it often refers to the “average clause,” a provision designed to address underinsurance. Here’s a breakdown of what that entails:
Understanding the “Average Clause”
- Purpose:
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- The average clause is primarily used by insurers to ensure that policyholders insure their property for its full value.
- It’s a mechanism to address situations where a policyholder has underinsured their property, meaning they’ve insured it for less than its actual value.
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- How it Works:
- If a policyholder is underinsured and files a claim, the insurer may reduce the claim payout proportionally to the extent of the underinsurance.
- Essentially, if you’ve only insured your property for, say, 75% of its actual value, you may only receive 75% of your claim amount.
- Why it Matters:
- It highlights the importance of accurately assessing the value of your insured assets.
- Underinsurance can lead to significant financial losses in the event of a claim.
- For property insurance, it is the rebuild cost, and not the market value of the property that is important.
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Key Considerations
- Accurate Valuation:
- Ensuring your property is accurately valued is essential to avoid the application of the average clause.
- For buildings, this means calculating the rebuild cost, which can differ significantly from the market value.
- Policy Details:
- It’s crucial to carefully review your insurance policy documents to understand the specific terms and conditions related to the average clause.
- Types of Insurance:
- While the average clause is commonly associated with property insurance, the concept of adequate coverage applies to various insurance types.
Beyond the “Average Clause”
It’s also important to note that “average” can also be used when discussing the “average cost” of insurance. This is a very different use of the word. The average cost of insurance can vary greatly depending on many factors, including:
- Type of insurance (e.g., car, home, health).
- Location.
- Individual risk factors.
In summary, the “average clause” is a vital aspect of insurance that emphasizes the significance of accurate valuation and adequate coverage.
When looking at the cost of insurance, that “average” will vary wildly.
We recently had a client who had not checked their sum insured for some considerable time. We always advise clients to check every renewal their sum insured. They also over the years had decided to not index link their property. This is critical.
Unfortunately, it has meant a fire claim is now being paid 36% less than what it should have been due to the underinsurance. It is critical that you insure your property for the correct amount. The BCIS do provide a free registration scheme where you can put your property through and they will be able to tell you what it should be insured for. We have the ability to provide this information through the BCIS for a small fee if required. It is there to protect you before any claim. Don’t be short changed on your sum insured it can cost you thousands.
3 key steps to protect businesses from underinsurance
Underinsurance is a problem that can affect businesses of all sizes, with small and medium-sized businesses (SMEs) being particularly vulnerable. Building underinsurance occurs when a property is not insured for its full rebuild cost, leaving businesses exposed in the event of damage or total loss.
Without sufficient coverage, companies may face significant financial shortfalls when making a claim. This guide outlines three essential steps to help businesses ensure they have the right level of buildings insurance and avoid costly gaps in coverage.
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1: Know what building underinsurance means
- Many businesses unknowingly fall into the trap of building underinsurance due to rising construction costs, outdated valuations, and/or policy limits that do not reflect current rebuilding costs.
- If a property is underinsured, any claim may be reduced proportionally, leaving businesses to cover a significant shortfall themselves.
2: Get accurate valuations
- Buildings should be insured for their rebuild cost (the amount needed to rebuild the building), not their market value. This includes materials, professional fees, and demolition costs.
- Use desktop assessments from RebuildCostASSESSMENT.com, part of RiskSTOP Group Ltd, to check the rebuild cost regularly and ensure the sums insured matches current rebuild costs.
- Correct valuations help avoid the ‘average clause,’ which can reduce insurance payouts if coverage is too low.
3: Keep insurance policies updated
- Review insurance policies every year or whenever there are significant changes to the property, such as renovations or structural modifications.
Please don’t hesitate to contact our sales director Charlotte Skinner on 01273 827090 or enquiries@iinsure365.co.uk