Calculation of average clause in fire insurance
The average clause meaning is that if your property is inadequately insured, your payout will be reduced proportionally. Let’s understand the calculation of the average clause with an example:
- Suppose your property is valued at INR 40 lakhs, but you have insured it for INR 30 lakhs.
- This means you are underinsured by 25% (10/40x 100).
- Imagine a fire breaks out, causing a loss of INR 20 lakhs to your property.
- In this case, the insurer won’t pay the full amount of INR 20 lakhs because of the average clause. They will reduce the claim by 25%.
Here’s how the claim amount is calculated:
Claim amount = (sum insured/actual value) x loss amount
= (30,00,000/40,00,000) x 20,00,000 = INR 15,00,000
In this case, the insurance company will pay a maximum of INR 15 lakhs.
How to avoid average clause in fire insurance?
The following are some tips to avoid the average clause in fire insurance:
- Get expert help: Talk to an architect or engineer to get an accurate value for your property and find the best insurance for your needs.
- Try online tools: Use online calculators to estimate your property’s value, but remember they might not be 100% accurate.
- Update regularly: Make sure to update your property’s value at least once a year or after major changes like renovations to keep your coverage on track.
- Read the fine print: Always check your insurance policy carefully before buying or renewing to make sure you understand any limits or exclusions.
Average value vs reinstatement clause
Here’s how the average value clause differs from the reinstatement clause:
- Average value clause: This clause applies if your property is underinsured. If a loss happens, the insurance payout will be reduced based on how much your coverage falls short.
- Reinstatement clause: With this clause, the insurance company will cover the full cost of repairing or replacing your property. The reinstatement clause does not consider the property’s wear and tear or depreciation.
Conclusion
While the average clause in fire insurance might reduce premiums, it exposes you to greater risk and higher out-of-pocket expenses during a claim. Therefore, it is recommended to insure your property for its full value so you don’t face unexpected costs during stressful situations.
Disclaimer: The information provided in this blog is for educational and informational purposes only. It is advised to verify the currency and relevance of the data and information before taking any major steps. Please read the sales brochure / policy wordings carefully for detailed information about on risk factors, terms, conditions and exclusions. ICICI Lombard is not liable for any inaccuracies or consequences resulting from the use of this outdated information.