How Underinsurance Affects Your Claim

THE AVERAGE CONDITION By Celia Griffith

underinsuranceProperty insurance policies contain a condition known as the “Average Condition”. This ensures an insured is indemnified to the extent that he has contributed to the common fund. The principle of insurance is based on the many contributing to a common fund to pay for loss experienced by the few. Therefore, each insured should contribute according to the exposure he brings to the pool. Accordingly, a person wishing to insure a building valued at $1m is expected to contribute premium consistent with this value, and should he suffer a loss is indemnified accordingly. If however that person declares the value of his asset to be $500,000 then he must by the same measure be content to be indemnified accordingly.

The effects of ‘average’ are not as harshly evident in a total loss situation as with a partial loss. With total losses the insured receives the sum insured (less deductibles, VAT etc.), but is then left to “fund” the difference. In fact, he becomes a co-insurer for his loss. In a partial loss situation, the effect is even less palatable. Let’s use an example to highlight the effects.

Therefore, Caveat Emptor! Let the Buyer beware. If you are unsure about your property values, speak to your Broker or representative, and act responsibly.