There is a serious issue present with businesses and people "under-insuring" their assets, and many renew policies every year with little or no thought into the process behind it.
However, fast-forward time for a claim, whether this is for a partial value of the whole sum insured or the entire value, an insurer may assess the value of that property as part of the claims processing routine. If the insurer discovers that the claimant is “under-insured” they may “apply average” to the policy.
An Average Clause is a formula used to calculate the amount payable for a claim based on the insurance coverage relative to the replacement cost of the property. Typically in Trinidad and Tobago, Average clauses are slapped on to all policies and are applied only if the property is insured for less than 85% of its replacement value, and the clause allows the insurance company to calculate the loss in proportion to the sum insured.
For example, if a property is insured for less than the replacement value and the premises are partially damaged, the insurance company will apply the following formula to determine the amount to be paid to the owner:
____________ XLoss = Claim Payout
Once the property is insured for less than its replacement value, the owner is responsible for the remaining portion of the risk.
Let’s take an easy example: Richard Ali insures his home and contents for $1,000,000 and he makes a claim for $300,000 following a massive fire in the kitchen. The loss adjuster/insurer assesses the total value of the home and contents to be actually $1,250,000. Thus the original policy was only for 80% ($1.25m / $1m) of the actual value. And the payment made when the insurer chooses to “apply average” will be 80% of $300,000 which is $240,000. Doesn’t sound good, does it?
This clause is one of the specific conditions of Property All Risks and Fire & Special Perils class of policies. Some Accident class policies may also contain an average clause such as Personal All Risks and Electronic equipment.
The Average clause will not apply to policies written on a ‘First Loss’ basis like Theft, Money and Deterioration of Stock, or when policies are written on an ‘agreed value’ basis.
Therefore, there is a serious duty to ensure you are aware of the dangers of "under-insurance" and "average policies". The ultimate decision as to the sum insured rests with you, the client, at every renewal but we will be here to safeguard you reach a suitable conclusion and you are always taking into account new additions and changes to your assets and insured values.
Get proper protection now. Call Bell Insurance Services Limited at 235-BELL to find out if you are properly covered.