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Average Clause

What's an Average Clause?

Property insurance policies are generally subject to the Pro Rata Condition of Average (known as the Average Clause). Many policyholders will remember this clause following Hurricane Gilbert in 1988, when national awareness was raised to its existence.

How does it work?

The Average Clause is applied when the insured property suffers damage and, at the time of the loss or damage, the actual value of the entire property is greater than the sum insured reflected on the policy. In this instance, you are said to be under-insured.

As you will have paid a premium based on the sum insured on the policy, you will not have contributed an adequate amount to the insurance pool to cover your entire property. Therefore, you will only be entitled to recover the proportion of the loss that the sum insured bears in relation to the total value of the property. In this case, you are considered your own insurer for the part of your loss which is not covered under the policy.

Let us break it down by example:

Should you have a property which has a value of $10,000,000, but you decide to insure it for $7,000,000 and you suffer a loss from an insured peril, the following formula would be applied in arriving at your claim payment:

Sum Insured   x   Amount of the loss   =   Amount Recoverable

Actual Value                      1                                            1

Example 1:   Assume the loss is $5,000,000 i.e. less than actual value and less than Sum Insured:

7,000,000    x   5,000,000   =   3,500,000

              10,000,000             1                        1

You will be paid $3,500,000 or 70% of your loss less any deductible stated in the policy.

Example 2:  Assume the loss is $8,000,000 i.e. less than actual value but greater than Sum Insured:

 7,000,000   x   8,000,000   =   5,600,000

               10,000,000               1                       1

You will be paid $5,600,000 or 70% of your loss less any deductible stated in the policy.

Example 3:  Should you have a total loss, that is, $10,000,000 (where loss is equal to the true value):

You will only receive the amount you insured the property for i.e. $7,000,000.00 less any deductible stated in the policy.

Check your policy carefully for special Average Clause provisions, e.g. 85% Condition of Average. This condition allows for full settlement of your claim provided your Sum Insured for the property is 85% or more of the true value.

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