Fire policies - condition of average clause

 

_{Fire policies - condition of average clause}

_{Insurance policies are governed by a set of conditions and clauses. One of the most important clauses in property insurance policies, is the condition of average clause. The clause ensures that the insured ‘s property is put to “as is where is” condition after a loss. The condition of average states that:}

_{If at the time of loss or damage, the property insured is collectively of a greater value than the sum insured thereon, then the insured shall be considered as being his own insurer for the difference and shall bear a rateable proportion of the loss accordingly.}

_{From an insurer’s viewpoint this clause is paramount as it is instrumental in deciding the amount of claim vis a vis the policy sum insured, along with other factors.}

_{How does the clause work?}

_{At proposal stage, value of the property is based on the prevailing market rate and the appreciation of property. However, the value of the property may depreciate with age and hence the appropriate method for fixing the sum insured is required. Depreciation of the property due to age and usage is to be accounted and applied on the market value of the property. Policyholders should therefore choose the sum insured of the property after taking account the depreciation, since sum insured only, will be the key factor while deciding the amount payable following a loss.}

_{Average clause in insurance policies ensures adequate insurance coverage, and equitable claim payment in case of a loss. To accommodate the underinsurance factor in property prices insurance policies use the average clause at the time of settlement of a claim.}

_{Average Clause is triggered when the insured property is undervalued at the time of a claim.  The value of property at the time of loss is compared with the policy sum insured and underinsurance is calculated.}

_{The formula for average clause in fire Insurance is:}

_{Claim Amount = (Sum Insured / Actual Value of Property) × Loss Amount}

_{Value of property: Rs. 10,00,000}

_{Sum Insured: Rs. 8,00,000}

_{Loss:  Rs 6,00,000}

_{Claim payable works out to: (8,00,000/ 10,00,000)x 600,000=4,80,000}

_{So, the additional amount of Rs. 1,20,000 (6,00,000 – 4,80,000) must be borne by the insured. This is also called as underinsurance clause as it takes care of the underinsurance aspect of the policy.}

_{Condition of average applies even in case of a partial loss. If a partial loss occurs due to fire, the insurance company does not pay the entire loss amount. Amount of claim payable is calculated based on the ratio of the sum insured to the actual property value and this underinsurance percentage is applied to arrive at the claim payable amount. This way the policyholder also shares a proportionate part of the loss and thereby the principle of average is applied.}

_{Average Clause is prominent in fire insurance policies, other forms of property insurance also have the average clause as the value of property and the policy sum insured impact claim settlement.}

_{One must understand that simply insuring property for higher value and paying higher premium will not ensure complete claim amount payment because over insurance is also not reckoned at the time of claim and one ends up paying higher premiums. One must adhere to the principle of utmost good faith while declaring value for insurance as misrepresentation is a policy violation and can lead to denial of claim.}

_{Between the insurer and the insured the contract is maintained on utmost good faith of both the parties. Exact and actual loss must be reimbursed and no one should be put to a loss The idea is to place the insured in pre loss position after the loss. For calculating the same the method adopted is the average clause. Average clause is the most pragmatic clause in calculation of claim and is legally binding on all parties.}

 

_{We at Zen Insurance assist in choosing the right insurance cover for your business units. Plan your insurance program wisely and contact us for assistance.}

_Disclaimer:

_{Zen Insurance Brokers is an IRDAI registered broker which facilitates quick & accurate insurance broking services. We deal with only regulator approved products of insurers. We do not underwrite the products.}