Home Average Clause
- Thread starter Sunny
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Brendan Burgess
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I have been aware of it for years, but I worked for a year in an insurance company.
Most people know that they should insure their home for its full value, and not for 50% of its value, even if they don't know the expression "average clause".
Brendan
Most people know that they should insure their home for its full value, and not for 50% of its value, even if they don't know the expression "average clause".
Brendan
I agree but reading that article it seems like if I insure a property worth €100k for €50k and there is total loss, the insurance company will only pay €25k. I didn't know that.
What's to stop an insurance company from overvaluing properties at the time of claims, saying you were under insured and then invoking this clause. I don't know anyone that gets their domestic dwelling professionaly valued for insurance purposes so most people estimate the replacement value. So if I make a mistake and only value the property at 90% of the replacement value, the insurance company will only pay out 81% of the true replacement value under this clause??
Brendan Burgess
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I don't think that this is correct.
If I insure half the value of a building, I will get half the value of any claim.
So if there is €100k of damage, I will get €50k compensation.
If there is €10k damage, I will get €5k compensation.
Steven Barrett
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If you had insured it for 50% of the rebuild value...
Sunny is correct in the example he gave.
And no, I hadn't hear about it until last year when I came across it in college.
Steven
www.bluewaterfp.ie
Is that not what Sunny said in the first place?
Brendan Burgess
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Hi DB
I was quoting Charlie, not Sunny. I think that Charlie is incorrect.
Brendan
I was quoting Charlie, not Sunny. I think that Charlie is incorrect.
Brendan
I am confused. How is your example any different to Charlies one? I have a building worth €100,000 and I insure it for €80,000 by mistake and the building is completely destroyed i.e. €100,000 worth of damage. Will the insurance company only pay me 80% of the €80,000 i.e. €64,000 instead of the full €80,000?
Steven Barrett
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Just re-read what Charlie said and yes, he is wrong.
If rebuild is €100k and €100k worth of damage is done, you get the €50k you insured it for.
If rebuild is €100k and €50k worth of damage is done, if you insure it for €50k, you only €25k.
The question is, what happens if the cost of a rebuild increases by 25% from the time you paid your premium and you claiming? Does the clause apply then or do they do they look at it at the policy renewal date?
Steven
www.bluewaterfp.ie
Its an unlikely occurrence in reality on a household policy. Most commercial property policies arent subject to average and include an allowance for uplift in the cost of reinstatement.
Well the Financial Times seems to agree with Charlie
Definition of average clause
A condition set by an insurer that a payment for damage or loss will be in proportion to the value insured. For example, if a building worth £100,000 but insured for £50,000 is totally destroyed, the insurers will only pay £25,000.
http://lexicon.ft.com/Term?term=average-clause
Definition of average clause
A condition set by an insurer that a payment for damage or loss will be in proportion to the value insured. For example, if a building worth £100,000 but insured for £50,000 is totally destroyed, the insurers will only pay £25,000.
http://lexicon.ft.com/Term?term=average-clause
Just realised that this is obviously where Charlie got the definition in the first place!
UK financial ombudsman has a calculator
claim sum paid = (sum insured / true value at risk) x loss
http://www.financial-ombudsman.org.uk/publications/technical_notes/under-insurance-household.html
Presumably the loss incurred refers to the true value of loss as opposed to insured value
I'm still confused. Under what circumstances would an insurer ever pay out more than the sum insured?
I always understood that if I insured the contents for €50K then this was the max that I could ever get under that policy
If that is the case then why would an insurer ever need to invoke an average clause?
I always understood that if I insured the contents for €50K then this was the max that I could ever get under that policy
If that is the case then why would an insurer ever need to invoke an average clause?
Brendan Burgess
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The UK ombudsman's definition is correct. The FT is wrong.
claim sum paid = (sum insured / true value at risk) x loss
Taking Charlie's/FT's figures
So, if a building worth €100,000 but insured for €50,000 is totally destroyed, the insurers will only pay €25,000.
(sum insured / true value at risk) x loss = claim paid
50/100 x 100 = 50
claim sum paid = (sum insured / true value at risk) x loss
Taking Charlie's/FT's figures
So, if a building worth €100,000 but insured for €50,000 is totally destroyed, the insurers will only pay €25,000.
(sum insured / true value at risk) x loss = claim paid
50/100 x 100 = 50
Steven Barrett
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Applying that formula to the €100k property that was completely destroyed:
(50,000/100,000) x 100,000 = 50,000
Or, as Charlie said in his article, if you only pay for half the cover, they will only pay out half the amount in a claim?
(50,000/100,000) x 100,000 = 50,000
Or, as Charlie said in his article, if you only pay for half the cover, they will only pay out half the amount in a claim?
Brendan Burgess
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Never.
If you have €50k worth of contents and insure them for €50k, you will be paid €50k if they are all stolen.
If you have €500k worth of contents and insure them for €50k, and they are all stolen, you will get €50k
If you have €500k worth of contents and insure them for €50k, and €100k are all stolen, you will get €10k.
mandelbrot
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I don't know what a tracker mortgage is....!