The Cost of Underinsurance and the “Average Clause”

Most people understand that when taking insurance a “sum insured” will be needed for the policy to make any sense. It is the amount you decide is the cost of replacement of the house, contents, specific item, in fact anything that is subject to the policy. It is the figure on which the premium you pay is partly based and is the figure that the insurance company will depend upon in its calculations of the claim. But what if you get the figure wrong? And, just what is the “under insurance calculation” that is used? In the event of a claim not being paid out in full, the insurance company will often cite their application of an “Average clause”, but, in insurance, what is an “Average Clause”?

The “Average Clause”

Most, but not all, insurance companies will have this in their policy terms and conditions. It is the calculation that they will using in offering the settlement figure on a claim when they believe the sum insured (provided by you) does not reflect the true value of the property or item that has been lost or damaged. Obviously, this only works when the true value is greater than the stated sum insured. You’re not going to get your claim increased if you accidentally “Over insure”!

Here’s an example.

In this simple example of a buildings insurance that has a true replacement value of £200k, but has been insured for just £100k it shows that the likely payout of the claim will be £50k. Any excess on the policy will then be taken off the final figure of £50k, so what you will actually receive will be even less.

The principle applied here is actually quite simple: The actual value was £200k at the time of loss, the sum insured was £100k. The sum insured is therefore 50% of what it actually should have been. As this event is deemed to be 50% underinsured, then the offer of settlement will be 50% of the given sum insured.

The formula is a constant. If, using a sum insured of £150k in the above example instead, the settlement offer would be £75k as the underinsurance would be 25%.

It’s Your Responsibility…

When it comes to setting the sum insured on a policy, whether it be domestic or business, it is down to you to get the sums insured correct. Even if you use a broker that is regulated to give advice, that broker must not guide you as to what sum insured should be on the policy. As far as property is concerned, only a suitably qualified surveyor can give an accurate rebuild cost for the purpose of insurance. A good working alternative getting a surveyor out to do such a valuation is to use the Royal Institute of Chartered Surveyors online rebuild calculator which can be accessed by clicking here If you are insuring a property for the first time after buying it on a mortgage, then a minimum sum insured will be included in your mortgage survey.

With regard to everything other that property values, it is very much down to you to estimate as best you can what it would cost to replace your entire contents of your business or home. Talking about how to do this can, and probably will, justify a post all of its own sometime in the future, but here are my top five tips for getting the sum insured figure as good as you can:

  1. Don’t just tot up the value of major items such as TV’s, furniture and kitchen appliances. Its the smaller items such as soft furnishings, games/DVD’s, garage or shed contents, pots and saucepans that collectively add up.
  2. Scan or photograph receipts of purchases of about £50. It really only takes a minute to do. Keep them all in a file and email it to your self each time you add to it.
  3. Walk around the house or business and take a photograph of each room. In the event of a major disaster like a fire or flood, you can just email the pictures to the loss adjuster or insurer and say “this is what the place was like before”
  4. Get valuations and photos of any items you specify, especially jewellery.
  5. Got a hobby or pastime? Just because its something you regard as an everyday item, don’t forget whatever it is can be costly to replace.

Not all policies have an “average clause” but the vast majority will. My working practice was to automatically query it whenever it was applied. A lot of the time a degree of “flexibility” was then introduced into the proceedings. If you find that it is being applied to your claim, always question it. If you are still not happy, ultimately there is the Ombudsman that can be approached. However remember…

It is your responsibility to get the sums insured correct- not the insurer or broker.

Make Friends With Data Protection

I have, on occasion, been accused of being a little impatient. I like to pick up the phone, ask a question, get an answer, say a cheery goodbye and move on with my day. The reality is that after being kept on hold listening to music, or being told that my call is important, or better still, playing “hunt the option”, a human will say hello. It is then their job to establish that they are talking to the right person, usually through the use of “security questions”. It can seem all a bit inconvenient, especially as I have heard it done quite badly over the years.

Ultimately, data protection is there for all our safety. There is an ever increasing chance that any of us may fall victim to identity theft or some other cyber crime. But what if we are trying to help someone else by calling on their behalf? If the data protection rules are being adhered to  properly, you will be politely told to go away and get the account or policy holders permission before they can talk to you. This is where everyone can help themselves with a little planning. All you have to do is let a company know who they can talk to.

Take the example of a couple living together in a house. They decide to take out house insurance and it is left to one of them to make the arrangements. They go online, or fill out forms and, in the absence of the other partner, just go ahead with their own details. It does, I assure you, happen a lot. Move forward some time and a claim arises. The partner who was not involved in the setting up of the plan calls to get the ball rolling and immediately is told that as they are not the policyholder, no information can be exchanged with them.

Another example, a little closer to my own situation. An elderly relative, living on their own, goes into hospital for a short while. During which time I am called upon to deal with some routine matters. Arrangements have been put in place for me to talk to some places, but others I came across for the first time and they, quite correctly, refuse to deal with me.

There is justification  for everyone letting the companies and organisations they deal with know who it is ok to talk to if you’re not around. All you have to do is let them know with a letter or email, who has permission to talk on your behalf if you are unwell, away or just simply unavailable. Don’t forget to give them the persons contact details as well because the company might be having difficulty contacting you.

Who should you tell?

In short, everyone you have dealings with, either as a client or service user. The list could go on and on, but typically would include:

  • Insurance Companies

  • Bank & Building Societies
  • PensionProviders
  • Local Authorities
  • Doctors
  • Utility Providers


Here’s a sample letter you can send:

And here’s a link if you would like to download and use it. Letter of Authority You can amend it to suit the situation, but make sure you include the full details of who you are giving authority to and remeber that it must be dated.  As you can see, it’ need only be short and to the point but sending such an authority can save a whole lot of hassle.

What Does An Insurance Broker Do?

F-questionI chose the title of this blog in order to keep things as broad as possible. However, I did consider other titles such as:

What Does an Insurance Broker Do, and Why should You Use One…Or Not


What Should You Expect From Your Insurance Broker?


You will notice how I have now cleverly incorporated all the titles I couldn’t decide between! The truth is, they are all good questions and I will try to do them all justice.


In short, a broker acts on your behalf in order to find the best policy to meet your needs.

Lets break that down a bit…


“Acts on your behalf”

This is true. By using a broker, you are effectively appointing them as your representative in all matters to do with the product you are buying or researching. The broker will also act on behalf of the Insurer in certain regards. These are in the main administrative, such as the authority to issue documents or administer the payment process.

There is also an obligation on the part of the broker to make the insurer aware of anything that may affect the insurers decision to hold cover. This means passing on as much information as possible to the insurer, and it is this element that sometimes I have been questioned about over the years.

The situation is actually quite simple. If all relevant information is given to an insurer, and after consideration they proceed with the policy, then everyone can comfortably go ahead with their lives knowing that in the event of a claim the insurance company has been in receipt of the full facts and the claim should be handled quickly and efficiently.

If, on the other hand, not all the relevant information has been passed on, then you can expect the claim to be subject to further scrutiny which, at best will slow things down. I should make it clear that is is now normal practice for insurance companies to distinguish between those cases where information has genuinely been omitted due to human oversight, and those where information has been deliberately concealed in order to obtain cover that otherwise would not have been granted.

Where a genuine oversight has occurred, I have always known things to be sorted out amicably. Unfortunately, there are people out there who don’t do things properly and with bad intent. In those cases the insurance company can cancel the policy as if it had never existed, and ultimately, in certain circumstances prosecute for attempted fraud.


A good broker should take the time to get all the information they need from you, and then present it in such a way that the insurer can make a quick decision.


“Find the best policy”

A broker will always try to find the best policy to match your circumstances. Wherever I have worked, I have never experienced anything other that the overwhelming desire to “do what’s best for the client”. However, the plain truth is that brokers do not have access to every product and I cannot see how anyone can categorically say that the policy being recommended is the best one.

It may well be the best one from those that broker has access to, but the current marketplace means that no one can actually choose from all the available products and providers. A lot of products are now only available online, or through specific high street channels such as banks and supermarkets, none of these will be available through a broker.

Typically, a broker will have agencies with a number of insurers. Not all insurers will grant a broker an agency. That’s not to say there is anything wrong with that broker, it may be that the insurer wants to insist on receiving a minimum amount of business that cannot be provided. It may be that the insurer feels it has enough brokers promoting their products in that area. It may be a number of reasons which in honesty do not matter. The point is that a broker can search the market for you, but the market being searched does not, and never will, include all the options.

With the rise in popularity of online brokers or “comparison sites” as they are more often called, it is becoming very difficult to justify using a traditional broker for the more straightforward car, home and travel insurances. A good broker will offer advice in these areas, however, given the rewards to the broker being offered for selling these products, especially the low levels of commission being offered for car insurance, it is just not cost effective to be active in that marketplace.


“Meet your needs”

I guess you wouldn’t like to be called “demanding” or “needy”. Yet, as far as insurance is concerned, you are, and here’s why; in order for you to be given a policy, you will, at the very beginning, be asked a number of questions, this can be verbally or online, even on paper and this can be in person with a broker who is able to advise you, or completely automated. The initial purpose of this questioning is the establishment of a “Demands and Needs” statement.

This is a document in which you state what it is you actually want. It will include sums assured, particular items to be included, in fact everything that you want a policy to cover. The broker or insurer then uses that as the basis of the product you will be shown. If there is anything on your “demands and needs” list that cannot be met, then this has to be pointed out to you. A copy of the “Demands and Needs” statement should always be included in the brokers paperwork that is sent to you. Read it. Make sure it is what you want, because if it is missing something there is a chance it may not be included in your policy.


Should I use a Broker?

It is very difficult to say that a broker is the best route for straightforward Home, Car and Travel insurance any more. Even in my final years in the business, I was using comparison sites and tellingly, so were my colleagues. Even some of the small business insurance is becoming more appropriate to find online. as long as you read everything that you are being asked to, then the non-traditional-broker option is both keenly priced and nowadays almost always supported by a 24/7 service.

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