Condition of average

Condition of Average (also known as the Average Clause) is a principle primarily used in the insurance industry, particularly within the context of property and marine insurance. This clause is invoked when an insured item is underinsured at the time of loss. It is designed to limit the liability of the insurer by ensuring that the insured bears a proportionate share of the loss if the value of the insured property at the time of the insurance claim is greater than the sum insured.

Overview

The Condition of Average is a fundamental concept in insurance policies that is applied when calculating claims. It is intended to encourage policyholders to insure their property for an amount close to its actual value. If a policyholder insures their property for less than its full value, they become a "co-insurer" of the property. This means that in the event of a claim, the policyholder will only receive a proportion of the claim amount, based on the ratio of the insured value to the actual value of the property at the time of the loss.

Calculation

The formula used to calculate the payout under the Condition of Average is:

\[ \text{Claim Payout} = \left( \frac{\text{Sum Insured}}{\text{Actual Value of Property at Time of Loss}} \right) \times \text{Amount of Loss} \]

This formula ensures that the claim payout is reduced proportionally if the property was underinsured.

Implications for Policyholders

Policyholders should be aware of the Condition of Average when taking out insurance policies. To avoid receiving reduced payouts in the event of a claim, it is advisable for policyholders to accurately assess and insure their property for its full replacement value. Regularly updating the insured value of the property can also help to mitigate the risk of being underinsured, especially in markets where property values can fluctuate significantly.

Related Concepts

• Insurance
• Underinsurance
• Co-insurance
• Property Insurance
• Marine Insurance

See Also

• Indemnity
• Insurance Policy
• Risk Management