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Average
When arranging insurance for items such as contents, plant, machinery, stock and other items of value, the sums insured you give to your insurer must be sufficient to cover the total “replacement as new value”. Some insurers will agree to cover items on an indemnity (market value) basis but this would have to be specifically agreed at the outset of the policy.
For buildings insurance the sum insured must be sufficient to cover the total cost of rebuilding including debris removal, shoring up and any professional fees (e.g. architects and surveyors).
It is always the responsibility of a policyholder that all sums insured are adequate to avoid under insurance.
In the event of a claim, if under insurance does exist, insurers will apply “average” whereby they reduce any claim payments by the same proportion that it is under insured.
A simple example:
A property’s rebuild value is £150,000 but is only insured for £100,000. A fire occurs causing £15,000 worth of damage. The insurance company appoints a loss adjuster who determines that the property is under insured (that it is only insured for 66.66% of its true value) and applies “average” to the claim. Only £10,000 is paid out for the claim.
If the underinsurance is severe, an insurer can avoid the claim in its entirety. If you are unsure as to the adequacy of your sums insured we would recommend that you seek a professional valuation.
