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.

Leave a Reply

Close Menu