Art. 09 · What the policy says · 3 min read
Underinsurance and the average clause
Most people assume that if a loss is smaller than the sum insured, it gets paid in full. For a great many commercial policies, that is not how it works.
Suppose a building would cost £1,000,000 to rebuild, but the schedule says £600,000, because the valuation is old, or the figure was a guess, or nobody updated it after the extension. You are insured for 60% of the value.
Now a fire causes £200,000 of damage. Well within the £600,000 limit. You would reasonably expect £200,000, less the excess.
What many policies pay is £120,000. The insurer applies the condition of average: because you insured 60% of the value, they pay 60% of the loss. You have effectively been your own insurer for the other 40% without knowing it, on every claim, not just the big ones.
- Covered
- Yours, whether you planned for it or not
The same principle applies to contents, to stock, and, most painfully, to business interruption, where the "value" is a projected annual gross profit that businesses routinely understate.
Some policies soften this. Ask whether yours has an "average waiver" or a "day one reinstatement" basis, both of which give you a margin before average bites. If it doesn't, the only defence is an accurate sum insured.
Use it
- Search your policy for the word "average." It will be in the general conditions. Read what it says before you need to.
- Treat the sum insured as a live number. Extensions, refits, new plant and construction inflation all move it. Nobody will tell you it has drifted.
- Ask about a waiver. Many insurers will waive average if you can evidence a professional valuation, which changes the value of getting one.