Average Clause or Under Insurance in Insurance

what is average clause in insurance

Meaning & Concept of Average Clause & Under Insurance:

The Subject matter is said to be under-insured  when the value for which it is insured is less than its actual value and if the insured value is inadequate, claims(if any) during that period will be payable accordingly by applying the Average Clause by the insurer.  Thus, the insurer can reduce its liability for a claim by applying the proportionate approach and the policy holder himself will be responsible for an unpaid claim amount.

Example of Average Clause & Under Insurance:

Suppose a property and its content is insured for Rs 10 lac. However, its actual value is coming out to be Rs 12 lac. In this situation the property and its content is under-insured to the extent of Rs 10 lac.

Now the specified property has experienced a

loss of Rs 5 lac due to one of the peril covered under the policy, then insurer will settle the claim for Rs 4.17 lac instead of 5 lac by applying the average clause with the below mention formula as property was under-insured.

  • Sum Assured: 10 lac
  • Actual Value. 12 lac
  • Claim Amount: 5 lac

Therefore the claim approved = Claim Amount*Sum Assured/Actual value.

In simple, by paying a little less premium we are accepting a huge risk that could create a big whole in our pocket, therefore it is imperative to take care of all the aspects before applying for an insurance contract and read the offer & policy document carefully so that even the minutes point could be taken care off.

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Source: www.financialgyaan.com

Category: Insurance

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