Average Clause Explanation

When you insure your asset like a building, you advise your Insurer of the value which then forms the sum insured under your policy. The insurer charges you an insurance premium based on this declared sum insured.

If you get this insurance value wrong and it is lower than the real value at risk, then your premium will be based on the wrong value and will be lower than you should have paid to cover the property at risk.

For example, if you have insured the structure of your building for R3 500 000 and the actual new replacement value at the time of a loss is say R6 000 000 you will only be paid out 58 % of your claim and you would be regarded as your own insurer for the balance. This is known as the “Average Clause” and although it may seem unfair at first, it is a vital part of any insurance contract and is applicable to the Contents and Building Sections of a short term insurance policy.

As an example, let’s assume the current sum insured of the building is R3 500 000 and you experience a claim to the value of R1 500 000 but at the time of the loss the assessor determines that the actual replacement value of your building is in fact R6 000 000, you would only be paid out R875 000 by the insurer subject to the policy terms and conditions and you would be regarded as your own insurer for the balance of the claim.

Current Sum Insured x The Claim Amount ÷ The Replacement Value = Actual claim amount
R3 500 000 x R1 500 000 ÷ R6 000 000 = R875 000

Make sure that you include everything in your calculations

Ensure that all the fixtures and fittings are included in the sum insured and a quick explanation to best explain this is – if you were to turn you home upside down, anything that falls out is regarded as contents and anything that remains intact is regarded as fixtures and fittings. Another scenario is, if you were to move – anything you take with you would be household contents and what you leave behind is regarded as part of the building fixture and fittings.