Definition
Average Clause
The average clause is a condition in property insurance that reduces a claim proportionately if the asset is underinsured at the time of loss.
If a property is insured for less than its full value, the average clause makes the policyholder a 'co-insurer' for the shortfall: a partial-loss claim is scaled down by the ratio of the sum insured to the actual value. For example, insuring a property for 60% of its value cuts a partial-loss payout to roughly 60%.
The clause enforces the indemnity principle and discourages deliberate underinsurance to save premium. It applies mainly to fire and property policies; choosing an adequate sum insured (ideally on a reinstatement basis) avoids the penalty.
Related terms
- Indemnity PrincipleThe principle of indemnity ensures an insured is restored to their pre-loss financial position but cannot profit from a claim, applying to general insurance.
- UnderinsuranceUnderinsurance is holding a sum insured lower than the actual value at risk, leaving the policyholder to bear part of any loss.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.