What Is Average Clause?

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In the world of insurance, understanding the various terms and clauses is crucial to making informed decisions and ensuring adequate coverage. One such term that often arises in property insurance is the “Average Clause.” While it might sound perplexing at first, the Average Clause plays a significant role in determining the compensation you receive in case of a loss or damage. In this blog, we’ll break down the Average Clause, explore its implications, and help you grasp its importance in protecting your valuable assets.

What Is Average Clause?

The Average Clause, also known as the “Underinsurance Clause,” is a provision commonly found in property insurance policies. It comes into play when the insured property is undervalued at the time of taking out the insurance policy. The purpose of this clause is to ensure that policyholders adequately insure their property and accurately assess its value to avoid underinsurance.

How Does The Average Clause Work?

Let’s say you have a property, such as a house, insured for a specific sum assured. If a covered loss or damage occurs, the insurance company assesses the claim based on the property’s actual value and the insured sum. If the insured sum is lower than the property’s value, the Average Clause comes into effect.

Here’s a simplified example to illustrate how the Average Clause works:

  1. Insured Sum: $150,000
  2. Actual Property Value: $200,000
  3. Covered Loss: $50,000

Calculation with Average Clause:

Claim Amount = (Insured Sum / Actual Property Value) x Covered Loss

Claim Amount = ($150,000 / $200,000) x $50,000 = $37,500

In this scenario, the Average Clause reduces the claim amount to reflect the underinsured portion of the property.

Importance Of The Average Clause

  1. Encourages Accurate Valuation: The Average Clause incentivizes policyholders to accurately assess the value of their property, ensuring that they are adequately insured.
  2. Fair Premiums: By ensuring accurate valuations, insurance companies can calculate fair premiums that reflect the actual risk and value of the insured property.
  3. Risk Mitigation: The Average Clause helps insurance companies mitigate the risk of insuring properties that are undervalued, ensuring the long-term sustainability of the insurance industry.
  4. Policyholder’s Responsibility: Policyholders have a responsibility to regularly review and update their insurance coverage to reflect changes in property value and avoid being underinsured.
  5. Transparency: The Average Clause promotes transparency by outlining the consequences of underinsurance and ensuring that policyholders are aware of the potential impact on their claims.

Conclusion

The Average Clause is a protective measure designed to ensure that property owners accurately assess and insure their assets, preventing situations of underinsurance. While it may seem like a complex concept, its underlying principle is straightforward: maintaining a balance between accurate valuations, fair premiums, and adequate coverage. As you navigate the world of insurance, understanding terms like the Average Clause empowers you to make informed decisions and secure your valuable assets effectively.

FAQ

What Is Average Clause In Simple Words?

: a clause in an insurance policy that restricts the amount payable to a sum not to exceed the value of the property destroyed and that bears the same proportion to the loss as the face of the policy does to the value of the property insured compare coinsurance.

What Is An Example Of An Average Clause?

For example, if the value of machinery is INR 1,00,000 and the buyer may purchase the insurance policy to indemnify the losses up to INR 30,000. So the insurance company will only repay 30 percent of the losses by imposing the condition known as the average clause in the fire insurance policy.

What Is The Average Clause In Accounting?

An average clause is applied to find out the value of a claim where value of the stock on the date of fire is more than the value of insured stock. Average clause is applied by the insurance companies to discourage the under insurance of stock or any other assets.

What Is The Average Clause In Insurance?

The average clause is a way of insurers paying out less than they need to if a policyholder is paying less than the premium they should be because they have inadequate cover. Insurers apply the average clause and only payout a proportionate amount for what you are claiming based on how much you are underinsured by.

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