Understanding the Average Clause in Property Insurance

Could underinsuring your property cost you more than you expect? In this edition of 2-Minute Tuesday, Amy addresses a critical question: "What is the average clause?"

What Is the Average Clause?

The average clause is a standard condition in many property insurance policies. It comes into play when a policyholder underinsures their property—that is, when the sum insured is less than the actual rebuild cost of the property. If a claim is made under these circumstances, the insurer can reduce the payout proportionally, reflecting the degree of underinsurance.

For example:

• Rebuild Cost: £200,000

• Sum Insured: £100,000 (i.e., 50% of the actual rebuild cost)

• Damage Sustained: £50,000

In this scenario, because the property is insured for only 50% of its rebuild cost, the insurer may apply the average clause and pay out only 50% of the claim, resulting in a £25,000 payout. The policyholder would need to cover the remaining £25,000 themselves.

Why Does This Matter?

Underinsurance can lead to significant financial shortfalls when claims arise. Many property owners mistakenly insure their property based on its market value rather than its rebuild cost, leading to potential underinsurance. The average clause ensures that policyholders bear a fair proportion of the risk when they choose to underinsure.

How to Avoid Underinsurance

To prevent the application of the average clause:

• Accurately Assess Rebuild Costs: Ensure your property is insured for its true rebuild cost, not its market value.

• Regular Reviews: Periodically review and update your insurance coverage, especially after making renovations or extensions.

• Seek Professional Assessments: Utilise services like RebuildCostASSESSMENT.com to obtain precise rebuild cost assessments tailored to your property.

  
  

Watch Amy Explain the Average Clause

For a concise explanation of the average clause and its implications, watch Amy’s 2-Minute Tuesday episode below.

Amy's answer to this question relates to how the average clause works in relation to insurance for the rebuild cost (AKA reinstatement cost) of the property insured.

Got a Question? Ask Amy

Do you have more questions about rebuild costs or property insurance? Or maybe something fun and light-hearted? Email AskAmy@RebuildCostASSESSMENT.com, and Amy might feature your question in the next 2-Minute Tuesday!

It's important to understand your building insurance when renovating.

Find out more here.

Don’t risk underinsurance – get assessed today

With accurate rebuild cost assessments from RebuildCostASSESSMENT.com, you can be confident your home is properly protected.

Need help? Contact Us for a quick and easy desktop assessment today.

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