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What is the Average clause in Insurance?

Updated: May 4

Ever tried to understand the fine print in your insurance papers? No? You’re not the only one. Insurance documents are complicated and full of insurance industry jargon like the ‘average clause’. But here's the thing when it comes to insuring your property – understanding the average clause isn't just helpful; it's vital. Get it wrong, and you could find yourself in a world of financial strife.

A surveyor outside a commercial property holding a clipboard and making notes for the rebuild cost assessment he is conducting.

What is The Average Clause in Insurance?

The average clause is usually found in the fine print of building insurance documents. It's a rule that insurance companies may use to make sure they only pay what they need to on claims, not more than they calculated they should. This clause is important when someone has not insured their property to its full value, which is commonly referred to as underinsured. When this happens, the insurance company will only pay part of any claims, based on how much the property was underinsured. For instance, if a property is only insured for half its value, the insurer might only cover half of any claim. This encourages people to insure their property for its full value.

By being on the ball and ensuring that the amount you’ve insured your property for matches its true value, you’ll know you’re safe if the worst were to happen.

For a quick explanation, you can watch our "Ask Amy" video below, and for more details, just keep scrolling.

Why a Rebuild Cost Assessment is So Important

A lot of property owners assume that the market value of their home is the amount they should insure the property for. But when it comes to insuring your home, it’s the actual rebuild value that matters, and that’s where the average clause comes in. The average clause is a big deal in the UK, and is catching a lot of property owners out. In fact, we’ve done the math:

9 out of 10 UK Properties Might Have It Wrong!

Recent research done at shows that a whopping 81% of UK properties could be underinsured. And another 14% might be paying too much, effectively overinsuring their properties. That's right, 9 out of 10 properties are missing the mark!

Obviously, being underinsured could mean you're left with a much smaller claim amount than you expected. But there are other financial reasons to get the formula right. Many residential and commercial properties in the UK are overinsured. This means there could be room to save on those hefty premiums!

With the right rebuild cost assessment (RCA), whether you're a homeowner, property investor, or commercial real estate mogul, you can be sure you’re paying the right premium and getting the right cover.

For more details, read our blog Understanding Rebuild Cost vs Market Value.

A woman in her late 30s seated on a garden bench outside her home, reviewing insurance papers in a tranquil neighbourhood setting.

Why Underinsurance is Such a Big Deal

It’s pretty simple: Being underinsured means there's a gap between what your property is worth and what your insurance covers. This could leave you in a pickle if things go wrong. Underinsurance often happens by accident through:

  • Getting the figures wrong: Homeowners and businesses sometimes shortchange themselves, underestimating the rebuild or replacement costs of their properties.

  • Saving on insurance costs: It's tempting to save on premiums by insuring your property for a bit less than its value. But imagine the worst happens – that saving could end up costing you, big time.

  • Ups and downs: As time rolls on, properties can go up or down in value. Market shifts, property improvements, inflation – they all play a part. Regular insurance health checks can prevent underinsurance and protect your assets. Read our blog The Clock Is Ticking: Validity Period of Your Rebuild Cost Assessment for more deatils.

The gap between actual value and insurance coverage is a growing problem around the nation. It's time to ensure your property doesn’t become a statistic.

Calculating The Average Clause Underinsurance Formula

So, what do the average clause and underinsurance have to do with each other? Here’s the gist:

When you're underinsured, the average clause means you don't get a full payout. The average clause lets insurers adjust their payouts in line with your underinsurance.

It’s important to understand the potential financial impacts for your property, so let’s break it down below:

Average clause calculation: Although insurance documents are rarely simple, the average clause calculation (or ‘average clause underinsurance formula’) is fairly easy to understand. It all comes down to the actual rebuild value (as opposed to the market value of your property):

(Amount Insured / Actual Rebuild Value) x Claim Amount

Still not sure what this means for your property? A couple of real-world scenarios will make it easier to understand.

Real-World Average Clause Insurance Examples

Using the formula for the average clause that we’ve just tackled, let’s take a look at some real-world examples of the clause in action:

Example 1: Meet Sarah, a savvy commercial property owner. She's insured her place for the market value of £400,000, thinking that had her covered. But after a fire breaks out on her property, she's staring at a rebuild cost of £800,000. With damages at £150,000, the average clause means the amount paid by her insurance company would equal a mere £75,000, thanks to a 50% underinsurance. That's a tough day at the office.

A devastated business owner sat outside of her offices that have been ravaged by fire. She has just realised that she is underinsured and will not get enough insurance money to cover the damage because of the average clause.

Example 2: Then there’s James. He regularly updates his residential property's value and has invested in a reliable rebuild cost assessment. His last check put his home's rebuild cost at £750,000 and so, he adjusted his insurance policy to reflect this. Facing a similar £150,000 damage, James is in the clear, with the full amount of his damages claim paid by his insurer.

Wrapping Up the Average Clause in Insurance

The average clause is a bit like the small print you find in any contract – easy to miss but oh-so-important. For all property owners, whether you’re a homeowner or a commercial property bigwig, it's important to be aware of this little clause. And regular, reliable, and accurate rebuild cost assessments are your best bet against potential hiccups.

Don't play the guessing game. Whether it's personal memories or professional stakes on the line, a spot-on rebuild cost assessment (AKA reinstatement cost assessment) is your safety net. Dive in deeper and get the ball rolling here.

Important disclaimer: The information provided here is for general informational purposes only and is not intended as professional advice. While we strive to ensure all information is accurate and up-to-date, the content may not reflect the most current legal or regulatory developments, standards, or practices. No representations or warranties are made (express or implied) about the accuracy of the information provided, and reliance on this information is strictly at your own risk.

We do not offer financial advice and nothing within this content should be construed as such. We recommend consulting with a qualified professional who can provide tailored advice based on your individual circumstances before making any decisions related to insurance.

Please note that we are not regulated by the Financial Conduct Authority (FCA) and as such, are not qualified to provide specific financial or insurance advice. Please see our footer for further information about us, including our website terms of use, privacy policy and more.


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