The average clause

The 'average clause' is defined as a clause in an insurance policy requiring that you bear a proportion of any loss if your assets were insured for less than their full replacement value. This proportion is the amount for which the assets were underinsured, expressed as a percentage of their indemnity value at the time of the loss.

This is really just another way of saying that, if your property is insured for less than it would actually cost to replace it, your insurer will pay out only a percentage of your claim.

For example, let's say Jim's apartment is insured for R500 000, but is actually worth R1 million. One day, while Jim is at work, an electrical fault causes the entire apartment block to burn down and Jim puts in a claim with his insurer for the total loss of R1 million. Jim's claim is successful, but he receives only R500 000, as the sum insured was only 50% of the actual value of his property. 

If the damage to Jim's apartment had been worth R100 000, he would have received only a R50 000 payout.

Because Jim is covered only for half the value of his property, he is entitled to only half the value of his claim.

It is important to take into account the cost of inflation and how it will affect the overall value of your property from one year to the next. Most homeowners' insurance policies are automatically adjusted each year to accommodate increases in building material costs. However, these adjustments may not always be enough to cover the actual cost of rebuilding your property or a particular part thereof. We therefore recommend that you reevaluate your property from time to time to be absolutely sure that you are adequately insured against any potential risks.