Unlocking The Average Clause In Insurance
A Crucial Element in Protection
Insurance is often seen as a safety net, a shield against the unforeseen. Yet, within the intricate world of insurance policies lies a lesser-known clause that can significantly impact policyholders: the Average Clause. Understanding this clause, its implications, and the importance of accurate rebuild cost assessment can make a world of difference when disaster strikes.What is The Average Clause in Insurance?
The average clause is a term found in many insurance policies, particularly property insurance. It is the insurance company’s way of ensuring that they only pay out what they are required to. It comes into play when the insured property's rebuilding costs declared in the policy is lower than its actual rebuilding costs at the time of loss or damage.
In such cases, if you are underinsured, the insurer may only pay out a proportionate amount of the claim if your property suffers any loss or damage, based on the underinsured percentage. As long as you insure your property for its true rebuild costs you will have no underinsurance issues when it comes to making a claim on your insurance policy.Why a Rebuild Cost Assessment is So Important?
A common problem when owning a property is assuming that the market worth of that property is the amount that it should be insured for. The rebuild cost is what matters. That is where the average clause comes in and is currently catching a lot of property owners unaware.9 out of 10 UK Properties Might Have It Wrong!
Recent research completed by RebuildCostASSESSMENT.com shows that an eye watering 81% of UK properties could be underinsured.
On the other end of the scale another 14% could be paying too much, effectively overinsuring their properties. Incredible!
Recent research completed by RebuildCostASSESSMENT.com shows that an eye watering 81% of UK properties could be underinsured.
On the other end of the scale another 14% could be paying too much, effectively overinsuring their properties. Incredible!
The cornerstone of property insurance is accurately assessing the rebuild cost of the insured property. This will determine the insurance cover amount needed to adequately protect against any potential losses. Underestimating the rebuild cost can lead to underinsurance, leaving you vulnerable to a financial loss in the event of a claim.
A thorough rebuild cost assessment takes into account lots of factors, including construction materials, labour costs, and market trends. Consulting with professionals such as surveyors or valuers can help ensure you receive an accurate estimation, safeguarding yourself against any risk of underinsurance.
In summary, with the correct rebuild cost assessment you can ensure that are not underinsured, or even overinsured and that you are paying the correct premium and getting adequate cover.Why Underinsurance is Such a Big Deal
There could be various reasons for properties being underinsured:
Getting the amounts wrong: underestimating the rebuild cost of the property.
Saving ££: policyholders sometimes insure a property for less than it’s rebuild costs to save on the premium. If you were to make a claim, then using this approach could cost you a lot more in the long run.
Market ups and downs: over the years properties rebuilding costs go up and down. Regular insurance checks can help prevent underinsurance.
Being underinsured means there is a big difference between what your property rebuilding costs are and what your insurance covers it for. This could have devastating consequences for you. In the event of a claim, insurers will only cover a portion of the loss based on the insured-to-actual value ratio. This means that you could be left to bear a significant portion of the financial burden, potentially leading to financial hardship or the inability to fully rebuild or replace your property.
Moreover, underinsurance can also result in disputes between insurers and policyholders, leading to prolonged claim settlements and added stress during an already challenging time.
Calculating The Average Clause Underinsurance Formula
So, when you are underinsured, the average clause means you will not get the full payout. An insurer will adjust their payout in accordance with your policy. Insurance documents are rarely simple or straight forward to read, but the formula to calculate the Average Clause underinsurance is easy to understand:
(Amount Insured / Actual Rebuild Costs) x Claim Amount = Insurance Payout Amount
This amount represents the percentage of the claim that the insurer will cover based on the declared rebuild costs in the policy. Still not sure? Carry on reading…..
Average Clause Insurance Example
Using the formula already explained, imagine you have a property with a market value of £300,000, but its actual rebuild cost is £500,000. Using the underinsurance formula:
(£300,000 / £500,000) x £200,000 = £120,000
In this scenario, the property has been insured for the market value of £300,000, but the rebuild costs of the property is actually £500,000. With the damages caused to the property totalling £200,000 the average clause would mean that the amount paid to you by the insurance company would only equal £120,000. The property is underinsured by 40%. If a covered loss occurs, the insurer would only pay out 60% of the claim, leaving you responsible for the remaining 40%. If the property was insured for the full rebuild costs of £500,000 then this claim would be paid 100% by the insurance company.
Average Clause in Summary
The Average Clause is a critical aspect of your insurance policy that you should not overlook. By ensuring regular accurate rebuild cost assessments and adequate cover, you can mitigate the risks of underinsurance and safeguard against unforeseen events.
In the complex landscape of insurance, knowledge is power. Understanding the Average Clause empowers you to make informed decisions, ultimately providing peace of mind knowing that you are adequately protected against life's uncertainties.
If you would like to know more or require any advice about the average insurance clause or the risks about underinsuring your properties then give us a call and one of our experienced staff will be able to advise you.
