Risk Bytes: understanding the application of average

What is the average clause?

Insurance policies covering property and handling equipment typically contain an average clause (sometimes referred to as an incorrect declaration penalty).

The purpose is to protect the insurer in the event the insured suffers a loss against an asset that has been declared to the insurer to be less valuable than it really is, in other words underinsured. Values will generally be assessed under an average clause at the time of loss.

Why is it important to be insured for the correct value?

If your property or equipment is underinsured, the average clause means you will recover proportionally less in the event of a claim. It is therefore vital to declare the correct value to the insurer at the start of the policy period – and to keep this value up to date

Particularly during times of higher inflation, if the loss occurs towards the end of a policy year, there is a greater likelihood of an average clause being triggered.