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Blog entry by Maxine Hayward

The Average Clause

The Average Clause

Have you wondered about the following?

  • Underinsurance
  • The Average Clause
  • The Average Clause formula
  • How to avoid the Average Clause in the future


Underinsurance can be defined as an instance in which your insurance cover – the amount your insurance policy will pay out in the case of a loss and subsequent claim – is less than what it would cost to replace the lost item.

Underinsurance could also be described as the occurrence when there is a shortfall between the amount of cover selected and the actual replacement value of what is being insured. Therefore, the client will only be paid a proportional part of the claim ensued. In the event of Underinsurance, the Average Clause will be put into effect.

Photograph by Scott Graham

The Average Clause

An insurance policy usually includes a general ‘average clause’ to indemnify the insurer should the value of an insured item at the time of the loss turn out to be greater than that stated by the insured on the policy (the instance of underinsurance).

An example of the Average Clause is as follows:

Let’s say John’s townhouse is insured for R800 000, but it’s actually worth R1 million. One day, while John is at work, an electrical fault causes the entire complex to burn down and he puts in a claim with his insurer for the total loss of R1 million. John’s claim is successful, but he only receives only R800 000, as his Sum Insured was only 80% of the actual value of his property. 

Similarly, if the damage to John’s apartment had been worth R100 000, he would only have received a R80 000 pay-out.

The Average Clause Formula

The formula determining average is as follows:

(Actual loss × Insured amount) / Value of goods or property at the date of loss

Suppose a property worth R1 500 000 is insured for R 600 000, and the fire insurance policy applies the average clause.

If half the property is damaged due to the fire, the loss that the policy holder incurs is about R750 000 based on the current worth of the property (half amount). 

However, the amount that will be paid by the insurer is:

= 750 000 × (600 000 / 1,500,000) = 300 000

Of course, 600 000 / 1,500,000 = 40%

750 000 * 40% = 300 000

 Therefore, the additional amount of R450 000;(750 000 – 300 000) has to be borne by the insured him or herself.

How to avoid the Average Clause in the future?

  • Be wary of valuation tools –Online valuation tools may help value the item being insured. Although these may act as an initial guide, double check the figures carefully and determine whether the tool is suitable for the particular circumstances.
  • Accurate valuation  – The sum insured should be based on the cost of rebuilding or replacing the item, and not necessarily the purchase price. As the broker, you should be able to assist in establishing what should and shouldn't be included when calculating the correct level of coverage.
  • Expert valuation – Depending on the size and complexity of the item, it may be necessary or beneficial to instruct a professional firm to conduct a detailed valuation.; This will provide the best estimation of the correct level of cover required.
  • Household inventory – Encourage the client to update their household inventory list or other list of assets on a regular basis to ensure that any new items are included and to remove items that they no longer have.

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