This is the situation where the insured has not arranged adequate insurance cover for the financial value of the property insured. In the event of a claim the principle of 'average' would then be applied.

Average is an insurance principle which has resulted in more discontented clients in the insurance industry than any other, yet it is a simple and easy one to understand. If an item or property is underinsured, the insured must bear a rateable proportion of each and every loss.

Average is applied for three main reasons:

·         To prevent underinsurance.

·         To obtain a full premium for the risk the insurer is carrying.  

·        To ensure that each party bears a fair share of each loss.

The formula determining average is as follows:

·         (Sum Insured / Value at Risk) x Amount of Loss

Example

CONTENTS CLAIM: 

A machine is insured for R10 000. The actual replacement value of the item is R20 000. If the machine was damaged by fire resulting in repairs to the value of R5 000 in repairs, the claims settlement would be calculated as follows:

(R10 000 / R20 000) x R5 000 Amount payable : R2 500

BUILDING CLAIM: 

A building is insured for R200 000. The actual reinstatement value of the building is R300 000. If the building was damaged by a hail storm to the value of R60 000 in repairs, the claims settlement would be calculated as follows:

(R200 000 / R300 000) x R60 000 Amount payable : R40 000

ARE YOU ADEQUATELY INSURED?

Use our Household Inventory form to determine the value of your property. If you are not adequately insured, call your insurance adviser or your nearest Mutual & Federal branch to increase your sum insured.