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Hidden In the wordings of all Insurance Policies which cover material damage (Buildings, Contents & Tenant’s Improvements) is a clause which Insurers refer to as the average clause.
Put simply this little known clause has the ability to restrict settlements of claims when you have provided (deliberately or not) an inadequate figure to cover your property in the event of claim.
The maths behind the clause is simple – If you’re insuring a house and the rebuild cost is £100,000 but for whatever reason you only request £80,000 as cover – Insurance companies can apply the average clause in the event of a claim and will deduct from settlement the amount that was under insured, so for example if the true cost of re-build is £100,000 but you have only requested cover for £80,000 then in the event of a claim, Insurers reserve the right to apply the average clause meaning that £20,000 would be taken from your sums insured of £80,000.
Naturally this would cause massive problem for you in terms of financing any re-build. Our sister company All Property Claims limited has a number of case studies;
Case 1 – Restaurant in London
A restaurant in London had prior to opening only requested £30,000 pounds worth of cover for the improvements to the unit – However the refit of the restaurant was £60,000 – The Restaurant was regrettably engulfed in a fire – But as the sums Insured where inadequate – The Insurer did not make a settlement – As a result the restaurant never re-opened and the business went into liquidation.
Why is this clause there?
When you enter into a contract with an Insurance Company to take on the risk management of your property the contract is entered into on the basis of utmost good faith – meaning that the Insurance Company will agree the contract without checking. However in order to save money on premiums or by an error in calculation’s Insurers are agreeing to provide you with cover for less than the true value – The average clause the Insurance Companies way of restricting their liability.
How can I prevent the clause being invoked?
The best advice and tips;
- Think about your property – If there was a total loss, what would be the realistic cost of reinstating your property to pre-loss conditions? There is a website provided by the ABI (association of British Insurers) the link for this is https://abi.bcis.co.uk/
- If you are a tenant and have made improvements at your leased or rented premises ensure that your cover for Tenants Improvements is adequate in the event of a total loss
- If you are unsure about your current cover levels feel free to call us on 0208 712 6148. We are able to provide you with an independent review.