Adequacy of Sums Insured and Limits of Indemnity
Many policies, for example Material Damage and Business Interruption, include an ‘Average’ clause. This means that if you make a claim and your sums insured are found to be inadequate your claim settlement will be proportionately reduced.
|
Example |
Sum Insured |
£100,000 |
|
|
Actual Value at Risk |
£150,000 |
|
|
|
Loss |
£30,000 |
|
|
|
Insurers pay |
£100,000
|
x £30,000 = |
£20,000 |
It is essential therefore that your sums insured and limits of indemnity are sufficient for the risks insured and are reviewed at regular intervals.
In the event that the insurance cover is subject to the policy condition of average, the sums insured must represent the full value of the risk insured in accordance with the basis of settlement detailed in the policy. If the sums insured fall short of the full value average may apply and claims settlements may only provide partial payment.
Whilst we are pleased to provide guidance on the basis of cover, we do not accept responsibility for the adequacy of the sums insured or indemnity limits. Where appropriate, we recommend that you consider professional valuation services.
Average - Where Average is said to apply and there has been under-insurance, the Insured's claim is reduced in direct proportion to the under-insurance.
There are different types of Average under different insurance policies. In some cases Average will not apply unless the sum insured is less than 85% of the actual Reinstatement Value.
Please ask us if you would like further information on how and where Average might apply to your insurances.
Average is applied differently to the two bases of cover.
Reinstatement - Average will apply if the sum insured at the time of reinstatement is inadequate but, generally, only if the sum insured is less than 85% of the cost of reinstatement.
Indemnity - Average will apply if the sum insured is inadequate at the time of the loss
The example shown above demonstrates the affect on a claim
It is therefore important to ensure that your sums insured for all items represent the full value at risk at the commencement of the policy period and that protection is in place to allow for inflation during the period