Average Clause

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Average Clause A condition by which an insurer determines that the payment for any damage or any loss will be in proportion to the value insured. Average clause applies when the sum insured is less than the actual value of the goods or the property. If you are underinsured, you run the risk of being unable to claim for the true and total cost of any losses you incur. For instance, a building worth 100,000 but insured for 50,000 is totally destroyed. If the average Clause stated the insurer will pay 50% of the insured value then the insurer will only pay 25,000, which represents 50% of the insurance value, but 25% of the full value. It is importance of obtaining full coverage of an asset at the outset, businesses must also bear in mind that the Average Clause dictates that the sum insured is always adjusted to reflect the present total value at risk. Unfortunately, underinsuring is quite common in many markets for various reasons. It can arise willingly to reduce the cost of the premium which should be paid on the sum insured. It can also occur by negligence, if the original sum insured has not been updated and increased because of increased value due to inflation or property extensions. Hence, the average clause is used more often. During inflation institutions may feel that having a lower sum insured/partially insuring an asset can help them save costs, the potential financial consequences arising from the Average Clause can far outweigh any initial benefits. Calculating average clause can be done using the formula: The amount of claim that the insured gets is calculated as follows: Claim amount = (Actual loss × Insured amount) / Value of goods or property at the date of loss. Some steps to reduce the risk of falling foul of the law of average in future: - Use valuation tools. - Provide accurate valuation. -On renewal, review and update the sum insured to avoid inflation hitches. -Use expert valuation, depending on the size and complexity. #benewinsurance #insurtech #inclusiveinsurance #insurance #reinsurance #takaful

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