As part of our ongoing insurance how-to we continue to explore the terminology and practices used in the Insurance world.
Today we will be looking at The Average Condition and will explore ;
- What is an Average Condition ?
- Example of Average applying to a Claim
- Special Condition of Average – 75%
- Why do Insurers apply an Average Condition ?
If a Sum Insured on an insurance policy is subject to Average, and the Sum Insured is less than the value at risk at the time of loss, any claim will be reduced in the same proportion as the amount of under insurance that existed at the time of loss.
In this example we have a scenario where a building is insured for a sum of £1,000,000
At the time of a major fire which causes £250,000 of damage to the property Insurers have calculated that the building was actually valued at £1,100,000
There was therefore an amount of under insurance at the time of the loss, in this case 10%
The Average Condition would therefore apply, so the amount of the claim settlement would be reduced by the same percentage – again 10%
The net amount paid by Insurers would therefore be £225,000
In some cases it is very difficult to assess an exact Sum Insured as values may fluctuate.
To avoid Average being unfairly applied in these cases some Insurers also offer an amended Average Condition whereby if the Sum Insured is 75% or more than the value at the time of loss no deduction is made for under insurance.
The Average Condition is applied to try and ensure that policyholders insure their property for the correct values.
As most premiums are calculated on a rate applied to a sum insured the Insurers are keen to receive the correct premium for the risk that they are covering, hence this must be applied to the full Sum Insured at risk.
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