Average clause

Average clause it is a clause in insurance policies, according to which the insured is obliged to cover part of the losses when his assets have been insured for an amount lower than their actual and full value.

Characteristics

The average clause's purpose is to protect the insurance company against dishonest declarations of its clients who could underestimate the value of their valuables, and its task is to ensure that the fair premium will always be included in the premium pool from which money is paid to all claimants. To insure against losses, insurers often include an average clause in policies that aim to proportionally reduce the amount insurers are required to pay depending on the level of insurance.

It is known that valuations (especially real estate) can vary significantly over the life of the policy. In order to counteract this phenomenon, a special condition of the average can be used, it is that the average will be used only if the proportion of the average falls below the percentage specified earlier.

The amount to be paid is limited to the sum insured indicated on the policy - in the case of an insurance claim. The assets will not be insured if the policyholder fails to assess the value of the restoration of assets when concluding the policy. If the value of asset insurance at the time of damage or loss is significantly or slightly less than its actual value, the insurer will reduce the value of the payment according to the difference, this means that the average clause will limit the liability of insurers. This means that the policyholder is considered to be the insurer of the insured amount at the time of any loss, and partial losses can be divided in proportion to the insured amount.

Adequacy of Sum Insured

Adequacy of Sum Insured - why it is important:

• Checking the adequacy of the sum insured is necessary to ensure that the value of the assets is truly reflected. Adequate adequacy of the sum insured will ensure that in the event of damage or loss of assets, the average clause will not be effective, while the insured's claim will be close to his expectations
• In the event of a liability arising, insurance of assets for a sum that is not in line with reality will not provide full coverage of the sum insured. There is a difference between the sum insured' (applies to protection in the event of a claim) and the actual value (refers to the value of assets).

Examples of Average clause

• In the event of a total loss, the Average clause can be applied if the insured value of the vessel is less than its true value. In such a case, the insured will have to bear a portion of the loss in proportion to the difference between the insured and true value.
• In the case of fire and theft insurance, the Average clause can be applied if the insured value of the property is lower than its true value. The insured would then have to pay the difference between the insured and true value as a portion of the loss.
• In the case of casualty insurance, if the insured value of a vessel or other property is lower than its true value, the Average clause can be applied making the insured responsible for the difference between the insured and true value as a portion of the loss.

Advantages of Average clause

The Average clause provides a number of advantages for the insured:

• It reduces the cost of insurance premiums for the insured, as the insurer does not have to cover the full value of the insured asset.
• It also encourages the insured to be more diligent in their asset valuation and assessment, as they will be held liable for any losses due to undervaluation.
• Additionally, it helps to ensure that the insured is not over-insured, as they will be liable for any losses if they are found to be over-insured.
• Finally, it can also help to reduce the risk of fraudulent claims, as it will be more difficult for the insured to claim for losses that exceed the value of their assets.

Limitations of Average clause

Average Clause is a clause in insurance policies that imposes a responsibility on the insured to cover a portion of the losses when their assets have been underinsured. The following are some of the limitations of Average Clause:

• The Average Clause limits the amount of insurance coverage that a policyholder can claim. It requires the policyholder to pay a percentage of the claim amount if the actual value of the insured item is higher than the amount insured.
• The Average Clause can be difficult to understand for policyholders and is often misused by insurance companies.
• The Average Clause does not cover all types of losses and may not apply in certain cases such as natural disasters or acts of God.
• The Average Clause may also not cover any additional costs incurred in the event of a claim, such as legal fees or additional repair costs.
• The Average Clause can lead to disputes between the policyholder and the insurance company, as the policyholder may not be aware of the exact terms and conditions of the clause.

Other approaches related to Average clause

The Average clause is an important element of insurance policies. In addition to this clause, there are other approaches which insurers can use to adjust their liabilities in case of underinsurance. These include:

• The Pro Rata clause, which apportions the loss between the insurer and the insured in proportion to the amount of insurance coverage and the actual value of the property.
• The coinsurance clause, which requires the insured to maintain a specific amount of insurance coverage in order to receive full coverage from the insurer.
• The Contribution clause, which stipulates that the insured must bear a certain percentage of the loss in the event of underinsurance.

In summary, the Average clause is just one of the various approaches that insurers can use to adjust their liabilities in case of underinsurance. These alternative approaches can provide greater flexibility for the insured to manage their insurance coverage.

Footnotes

.

Average clause — recommended articles

Dual insurance — Constructive Total Loss — Insurable value — Period of indemnity — Indemnity principle — Unearned premium reserve — Declared value — First party insurance — Assignment clause

References

• Hudson G. N. and others, (2013), Marine Insurance Clauses, CRC Press, p. 11
• Mishra M.N. and others, (2016), Insurance Principles and Practice, 22nd Edition, S. Chand Publishing, p. 411
• Pearson R., (2017), Insuring the Industrial Revolution,Taylor & Francis, p. 309
• Talley W., (2013), Maritime Safety, Security and Piracy, CRC Press, p.293
• Wallcot L. A., (2019), Commonwealth Caribbean Insurance Law, Routledge, p. 213.

Author: Monika Sojka