Fully insured, and still only paid 60%.
You can pay every premium, suffer a genuine loss well within your sum insured, and still have the claim cut sharply. The clause that does it is called "average" — and it is one of the most common reasons a valid property or business-interruption claim is quietly underpaid.
How the "average" clause works
Most property and business policies contain an average — or under-insurance — clause. In plain terms: if the sum insured is less than the true value of what is covered, the insurer pays only the same proportion of your loss as you were insured for. For the shortfall, you are treated as your own insurer.
The penalty applies even when the loss itself is far smaller than the sum insured — so a business can be caught by it without ever coming close to a total loss.
A worked example:
- The value. Your building costs $1,000,000 to rebuild today. It is insured for $600,000 — so it is 60% insured.
- The loss. A fire causes $300,000 of damage. That is well within the $600,000 sum insured, so you would expect it paid in full.
- The payout. Because you were only 60% insured, average pays 60% of the loss — $180,000. You carry the remaining $120,000 yourself.
Nothing went wrong at claim stage. The shortfall was built into the policy years before the fire.
How businesses end up underinsured
- Values drift upward. Rebuild costs, new equipment and higher stock levels rise year on year, but the sum insured is renewed at last year's figure.
- Cover is set to save premium. A lower sum insured means a lower premium — and the penalty only appears at the worst possible moment.
- Reinstatement is confused with book value. Insuring at the depreciated accounting figure, rather than what it actually costs to rebuild or replace, leaves a built-in gap.
- Business interruption is understated too. The gross-profit sum insured and the indemnity period are often set too low, so the same average penalty hits the BI claim.
- The policy is never stress-tested. No one asks "what would a total loss actually cost?" until a loss forces the question.
What protects you
- Insure at true reinstatement value. The cost to rebuild or replace as new, not the figure in the accounts — and review it every year.
- Get valuations for the big exposures. A professional reinstatement-cost assessment removes the guesswork on buildings and plant.
- Set the BI sum insured and indemnity period realistically. Match them to how long recovery would really take and the gross profit at risk.
- Understand how your policy defines and applies average. The wording varies, and some clauses are more forgiving than others.
- Challenge an average deduction — don't just accept it. Adjusters apply it as standard, but the basis of the valuation and the way the clause is applied can often be argued.
Not sure your cover would stand up to a major loss?
Whether you want a claim reviewed after an "average" deduction, or simply to know your policy would hold up before anything happens, the first look is free and confidential.