Underinsurance and the average clause

Most household and commercial policies carry an average clause. It is two lines long, and it is the reason a claim comes back at less than the invoice.

How it works

The insurer compares the sum insured with what the property was actually worth at the time of the loss. If the sum insured is short, the settlement is reduced by the same fraction.

A shop declares stock at £120,000. The stock at the time of the break-in was worth £160,000. The loss is £40,000. The settlement is not £40,000. It is:

£40,000 × (£120,000 ÷ £160,000) = £30,000

The shop is not underinsured by £40,000. It is underinsured by a quarter, and every claim it makes for the rest of the year is a quarter short, including the small ones.

Why the sum insured drifts

Rebuild cost is not market value. A terrace worth £240,000 to a buyer can cost £310,000 to rebuild, because the buyer is not paying for scaffolding, a party wall award and a skip.

Stock moves with the seasons. A shop that carries £90,000 in February carries £150,000 in the first week of December, which is also the week it is most likely to be broken into.

Nobody re-reads the schedule. The figure was right when it was set. Index-linking tracks a national index, not the extension you built last year.

What to do about it

Ask for the sum insured to be reviewed at renewal rather than rolled over. For buildings over about £500,000, a professional rebuild cost assessment is worth its fee. For stock, tell us the seasonal peak and we will write an uplift into the policy rather than leaving you to carry it.

If you would like the figures on your own schedule checked, send us the renewal notice and we will go through it with you.