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Condition of average
Condition of average (also called underinsurance in the U.S., or principle of average, subject to average, or pro rata condition of average in Commonwealth countries) is the insurance term used when calculating a payout against a claim where the policy undervalues the sum insured. In the event of partial loss, the amount paid against a claim will be in the same proportion as the value of the underinsurance.
The formula used is
where Payout is the amount paid out by the policy, Adjusted Loss is the realisable amount from the amount claimed against the policy after a loss, Sum Insured is the maximum amount to be paid out by the policy, and Current Value is the value the policy should be insured for. Underinsurance occurs when Sum Insured is less than Current Value.
Sum Insured is the maximum amount that can be paid out and is only paid out in cases of total destruction. Where partial destruction occurs (a more common occurrence than total destruction), Payout is pro rata in line with the underinsurance. This is due to insurance companies basing the premiums on their risk of losing the full Sum Insured against total destruction events.
Where a building's insurance policy is subject to average, underinsurance can result in very high liabilities on the owner. For example, if a flood or fire causes $3M of partial damage, the building is insured for $5M, but its true value is determined to be $10M, the payout will be
This would leave the owner with an underinsurance shortfall of $1.5M. In the case where a building is listed and has a mandatory rebuild order, it could be ruinous.
Under certain conditions, if the sum insured is 75% or more of the current value, no deduction is made for partial losses. This is an example of a coinsurance, with coinsurance requirement of 75%.
The contents of buildings are insured either separately from the buildings, or, frequently with dwelling houses, as a separate part of a combined buildings/contents insurance policy. Whether separate or joint policies are used, the insurance claim on either part cannot be transferred to the other, for example, under insurance of the contents cannot be offset by the claim made on the buildings insurance.
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Condition of average
Condition of average (also called underinsurance in the U.S., or principle of average, subject to average, or pro rata condition of average in Commonwealth countries) is the insurance term used when calculating a payout against a claim where the policy undervalues the sum insured. In the event of partial loss, the amount paid against a claim will be in the same proportion as the value of the underinsurance.
The formula used is
where Payout is the amount paid out by the policy, Adjusted Loss is the realisable amount from the amount claimed against the policy after a loss, Sum Insured is the maximum amount to be paid out by the policy, and Current Value is the value the policy should be insured for. Underinsurance occurs when Sum Insured is less than Current Value.
Sum Insured is the maximum amount that can be paid out and is only paid out in cases of total destruction. Where partial destruction occurs (a more common occurrence than total destruction), Payout is pro rata in line with the underinsurance. This is due to insurance companies basing the premiums on their risk of losing the full Sum Insured against total destruction events.
Where a building's insurance policy is subject to average, underinsurance can result in very high liabilities on the owner. For example, if a flood or fire causes $3M of partial damage, the building is insured for $5M, but its true value is determined to be $10M, the payout will be
This would leave the owner with an underinsurance shortfall of $1.5M. In the case where a building is listed and has a mandatory rebuild order, it could be ruinous.
Under certain conditions, if the sum insured is 75% or more of the current value, no deduction is made for partial losses. This is an example of a coinsurance, with coinsurance requirement of 75%.
The contents of buildings are insured either separately from the buildings, or, frequently with dwelling houses, as a separate part of a combined buildings/contents insurance policy. Whether separate or joint policies are used, the insurance claim on either part cannot be transferred to the other, for example, under insurance of the contents cannot be offset by the claim made on the buildings insurance.