Average Clause

It is tricky to give advice when it comes to Home Insurance. The concern of under-insuring the property or over-paying the premium when one insured too much is one of the difficulties the homeowner faced and we cannot blame them for it. Different people view the valuation of the same property differently as seen below in a jokingly manner.

The safest approach is to insured a higher value than the actual worth of the property but it is not really practical as it will increase the premium of the policy. In most cases, homeowners tends to under-insured the property either to save the premiums or there was no proper valuation for the insured items. It is common that the insurance policy was purchased many years ago and there was no review done even though the property had appreciated in value. The under-insuring of property is unhealthy to insurance company. Imagine your property is worth a million but you declare and purchase a Home Insurance for only $700,000 and the insurance company have to pay the full amount of $1mil when a claim arise. It is not fair to the insurance company or those who declared and paid the full amount of their property valuation. Thus, insurance have the “Average clause”.

The Average Clause is a term used when the settlement of a claim at the point of loss is greater than the sum insured. The reality is valuation of contents, stocks, properties fluctuate over time and insurer will not penalise just because the sum assured was less than the insured items. There are acceptable thresholds for insurers before the average clause kicks in and it can varies from 80-85%. If a insurer have a 80% threshold, it will not penalise the policy holder if the sum assured is below the actual claim valuation if it not less than 20%. When the average clause kicks in, the payout regardless of total or partial loss will be base on the below formula

Payout  = Loss Suffered x Sum Assured/Current Value.

For e.g. John insured his $1mil property for $600,000. A fire broke out and the valuation of the property $1.2mil . The loss and repair cost was assessed to be $200,000. Using the average clause,

Payout  = Loss Suffered x Sum Assured/Current Value.

= $200,000 x $600,000/$1,200.000

=$100,000

John will be penalised 50%.

As we can see, under-insuring can cause a policy holder to suffer badly at the point of loss. ASK are some ways to avoid under-insurance.

1. Always review your valuation of your contents that you are insuring.
2. Speak to your financial advisors to understand how your average clause works.
3. Know what is the threshold of your policy before the average clause kicks in.

One way to avoid average clause is to look for policies that are based on First loss basis.