I recently worked with a client who was making an insurance claim for £50,000. It was a good claim, too, with nothing the loss adjuster could object to — except for one little detail. It turned out the claimant was underinsured by 40%.

The result? Instead of receiving the £50,000 needed to make the necessary repairs to their property, this person only got £30,000 and had to pay out for the rest. They might as well have thrown that £20,000 in the bin — simply because they didn’t check the Average Clause on their insurance policy.

When you initially insure your home, the insurer will request its “insurance value”, which will become the sum for which your home is insured. This will be used to calculate the premium you pay on your policy, as well as the amount that can be paid out if you need to make a claim.

If the figure you’ve given the insurer is too low, you’ll be underinsured. It’s not difficult to get the right figure when you first take out the policy. The problem comes if you simply let it be renewed year after year without updating the information, while the actual market value of your home leaves that figure far behind.

The Condition of Average

So why should this be a problem? The reason, of course, is that any insurance claim you make would involve asking the insurer for more than your premium covers, and no business would survive if they allowed that to happen. So all policies allow the insurer to apply the Condition of Average.

This specifies that if, for example, you’ve only declared 50% of the insurance value, you’ve only paid 50% of the premiums and the loss adjuster will only allow 50% of your claim. If you were claiming £50,000, with an excess of £250, for a property worth twice the declared value, the calculation would be:

• 50% Average of a £50,000 claim = £25,000
• Less policy excess of £250 = £24,750 pay-out
• Total loss on £50,000 claim = £25,250

A loss of this size could be devastating, so if you think you might not be up to date under the Average Clause, consult your insurance broker as soon as possible. Alternatively, of course, you’re always welcome to get in touch with us for a chat about it.