“I’ve been told that if I don’t insure my property at the correct value I could be subject to average in the event of a claim. What does this mean?”
Average is a clause that is applied to the majority, if not all, insurance policies. It is applied to provide an element of protection for the insurance provider in the event of a claim. It does this by preventing a claimant from being able to receive more than their actual property is worth, and it aims to stop those purchasing insurance from listing their property at a lower than actual sum insured.
It’s therefore crucial that you insure your property for the correct amount, whether this is your home, livestock or vehicles. Average is applicable to anything you or your business owns and chooses to insure.
If you choose to insure your property for less than it’s worth or attempt to claim for more than its listed sum insured it is likely you will actually receive less in the event of a claim. Here’s a couple of examples to show how the average clause works in practice;
Farmer A has had a shed suffer damage in a storm. To completely rebuild the shed it would cost £200,000, but Farmer A only has the shed insured for £100,000. As the premium for the shed was based on the understanding that the entire value was £100,000, the claim settlement would be reduced by 50%. The repairs to the shed cost £10,000 but as Farmer A was under-insured by 50%, they would receive only £5,000 in settlement due to average.
Farmer B owns 100 Ewes worth £110 each. 60 of them have been stolen so a claim for £6,600 is submitted. However, Farmer B only has £5,000 listed in their insurance schedule for Sheep so is only paid £3,000 as Farmer B is underinsured.
Average can be calculated using the following equation;
Sum insured ÷ true sum insured x loss = amount paid in claim
So in Farmers B’s example the calculation would be;
£5,000 ÷ £11,000 x £6,600 = £3,000
To ensure you are not left out of pocket in the event of a claim it is vital you conduct a thorough review of your insurance with your insurance adviser annually and let them know of any changes you make to your business throughout the year.
Professional valuations of property, farm buildings, machinery and livestock can often be arranged free of charge through your insurance provider or with local surveyors or dealerships.
Charlotte Wilson | 07850 500433 | charlotte.wilson@fandmgroup.co.uk
