The introduction of the Condition of Average or the Average Clause is a mechanism designed to allow policy holders to participate in loss settlements whenever the sum insured is less than the full value of damaged property.

The Average Clause applies to all commercial and residential property insurances and  affects the policyholder if there is a loss and the property is insured for less than the cost to replace it. The policy holder will be considered his own insurer for the difference and any settlement will be in the same proportion which the sum insured bears to the value of the property.

For example, if your house is valued at $20,000,000 but you insure for $10,000,000, you are only insured for 50% of the value. If there is a partial loss of $5,000,000, you will receive a settlement of $2,500,000 or 50% of the loss, (less any applicable deductible). The calculation is as under:
Sum Insured             x      Amount of the loss   =     Amount Recoverable  
Replacement Value                      1                                         1
The Average Clause which applies to the following policies:
  • All Fire & Allied Perils/Commercial All Risks
  • Homeowners Comprehensive,
  • Consequential Loss,
  • Burglary,
  • Computer All Risks
  • Goods-in-Transit,
  • Contractors’ All Risks,
  • Plant & Equipment All Risks,
  • Electronic equipment All Risks
  • Machinery Breakdown,
  • Boiler and Pressure Vessels
We recommend that policyholders obtain valuations which accurately reflect the replacement costs of their property to avoid underinsurance and the application of Average should a loss occur. 

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