Updated · General information, not advice · TitanDC
What the average clause actually says
Many short-term policies covering buildings, contents and business assets contain an average condition. It says that if the sum insured is less than the value at risk at the time of the loss, you are treated as carrying part of the risk yourself, and the claim is reduced in that proportion. It is not a penalty; it is the arithmetic of having paid premium on a smaller amount.
- It applies to partial losses, which is where people are caught out
- It is assessed at the time of the loss, not when the policy was taken out
- It applies per item or per section, depending on the wording
- The insurer does not set the figure for you: work it out with your adviser and check that the schedule shows it
A worked example
The numbers below are round and invented, chosen to make the arithmetic obvious. Suppose a building would cost R10 000 000 to rebuild today, but it is insured for R6 000 000. A fire causes R2 000 000 of damage — a partial loss, nothing like a total one.
- Rebuilding cost (value at risk): R10 000 000
- Sum insured: R6 000 000 — that is 60% of the value at risk
- Damage: R2 000 000
- Claim paid: 60% of R2 000 000 = R1 200 000
- Shortfall you carry: R800 000, on a claim well inside the sum insured
- That is before any excess or other adjustment the policy makes
Why sums insured drift out of date
Almost nobody sets the wrong figure deliberately. It drifts, because the number was right once and nothing prompted a review while the cost of rebuilding moved.
- Building costs rise: labour, materials and professional fees all move
- Improvements are made and never added to the policy
- Municipal or market value is used instead of rebuilding cost — a different number
- Regulations change, so rebuilding now requires work the original did not
- Contents accumulate quietly: a household or a business owns more each year
Getting the number right
The figure you want is what it would cost to replace or rebuild today, in full, with the work and fees a real rebuild requires. For a business, the same logic applies to stock, plant and equipment.
- Buildings: rebuilding cost including professional fees, demolition and debris removal, and compliance with current regulations
- Contents: what replacing everything would cost new, not what it was worth used
- Business assets: stock at cost, plant and equipment at replacement value
- Review it annually, and after any significant change or improvement
- For larger risks, have it professionally assessed rather than estimated
Common questions
What is the average clause in insurance?+
A policy condition stating that if the sum insured is less than the value at risk when a loss happens, the claim is reduced in the same proportion. Insure for half of what something is worth and you can expect roughly half of a claim.
Does underinsurance only matter for a total loss?+
No — the opposite. It bites hardest on partial losses, because people assume a claim smaller than the sum insured will be paid in full. Where the average condition is triggered it is reduced, whatever its size.
Should I insure my house for its market value?+
No. Insure it for what it would cost to rebuild, which is usually a different figure from the market or municipal value. Market value includes the land and reflects what buyers will pay; rebuilding cost reflects construction, fees and compliance.
How often should a sum insured be reviewed?+
At least annually, and whenever something changes — an extension, a renovation, significant new contents or equipment, or a change of use. Building cost inflation alone can make a figure materially short within a few years.
Can an insurer apply average even if I told them the value?+
The sum insured is what the policy is issued on, and average is tested against the value at risk at the time of the loss. Disclosing a value to an adviser does not change the sum insured until the schedule reflects it. Check the schedule, and if it does not show the value you gave, raise it with your adviser straight away.
Sources
This page cites the legislation and regulators it relies on, so you can check it.
General information about how the average condition works in South African short-term insurance, not advice. Whether and how average applies depends on the policy wording. Figures used are illustrative only. TitanDC is an authorised financial services provider, FSP 8972.