# Average Clause in Fire Insurance

An average clause in a fire insurance policy addresses underinsurance. If the assets are insured for less than their full value, the insured must pay a proportion of the loss according to the policy's average clause. Since a fire insurance policy is an indemnity contract, the insured cannot claim more than the actual loss.

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## Fire Insurance Policy Average Clause Short Notes

1. The insured must pay the difference if the actual value of goods or property is higher than the insured amount.
2. If there is a difference between the insured amount and the actual value, the insured covers this difference.
3. Insurance companies only pay a proportionate share of the loss.
4. Average clauses apply when the actual value of goods or property is less than the insured amount.

## Calculation of Average Clause in Fire Insurance

It is essential to understand the calculation of the average clause in fire insurance in order to determine the liability of the insurer for the reimbursement of the claim.

The average clause formula that the insurer generally uses to determine the value of an insured claim could be denoted as:

Insured claim amount= (Actual loss x Insured value) / Actual value of property

In the average clause formula mentioned above,

• Actual loss refers to the loss that has been incurred by the insured during the occurrence of fire.
• Insured value refers to the value for which the insurer purchased the fire insurance.
• The actual value of property refers to the total value of the property at the time or day of fire incidents. The actual value is determined after applying the appropriate depreciation on the insured property.

## Case Study

Let us discuss a case study in order to see how the average clause in fire insurance is determined.

Mr. Suresh, the 45 years old businessman, owns a factory manufacturing garments, which he caters to the shopper for business purposes.

One day, during the operation of a business, a fire engulfed his factory where he lost the stocks of garments that were ready to sell. He approached the insurer of fire insurance online and claimed the loss. The surveyor found the average clause in the fire insurance policy and discovered the value of the claim as follows:

Actual value: INR 4,00,000

Sum Insured: INR 3,00,000

Loss incurred: 2,00,000 (Since half of the stock caught fire)

Hence, on the basis of the average clause in insurance policy, the surveyor determined the claim value by applying the formula mentioned above:

Insured claim amount= (Actual loss x Insured value) / Actual value of property

= (2,00,000 x 3,00,000) / 4,00,000

= 1,50,000

The insurer is liable to pay INR 1,50,000 while the insured has to bear INR 50,000

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## How to Avoid the Average Clause in Fire Insurance?

To avoid the Average Clause in fire insurance, the best approach is to insure your property for its full value. However, accurately assessing the property's value can be challenging due to factors like depreciation, appreciation, inflation, renovations, and market fluctuations.

Here are some tips and recommended actions to prevent common issues in fire insurance policies:

1. Consult an Expert: Seek advice from a valuer, architect, or engineer to determine the accurate value of your property. These experts can also recommend the appropriate policy and coverage for your property and needs.
2. Use Online Tools: Utilize calculators, estimators, or comparators to help estimate your property's value. These tools can provide a range or benchmark based on various factors such as location, size, age, condition, and features. However, be aware that they may not always be up-to-date or fully accurate for your specific property.
3. Update Valuations Regularly:Regularly update your property's valuation, at least once a year, or whenever significant changes occur, such as renovations, extensions, or improvements. This helps adjust the sum insured and the premium accordingly, avoiding underinsurance or over-insurance.
4. Review Policy TermsThoroughly review the terms and conditions of your fire insurance policy before purchasing or renewing it. Pay attention to exclusions, limitations, and endorsements that could affect claim settlements.

## Average Value Clause vs Reinstatement Clause in Fire Insurance

The average value clause applies to policies based on the property's market value, accounting for depreciation. The reinstatement value clause applies to policies based on the replacement or repair cost of the property, unaffected by depreciation.

Conclusion

The average clause in fire insurance can be calculated by another method given below.

Value of goods: INR 1,00,000

Insured value: INR 30,000

Loss due to fire: INR 20,000

In this circumstance, INR 30,000 represents the value of goods which is 30 per cent of the total value of goods. The loss incurred due to the fire is INR 20,000 (20 per cent of the total value of the goods). Hence, the insurer will only pay 20 per cent of the insured value, INR 6,000. The remaining INR 14,000 will be borne by the insured.

• ### Q1: Are average clauses applicable only to fire insurance policies, or do they apply to other types of insurance as well?

Ans: While fire insurance frequently uses the average clause, it can also be applied to other types of property insurance. This clause is especially common in policies where the insured value significantly affects the settlement. Although predominantly found in fire insurance, similar principles may apply in other property insurance contexts to prevent underinsurance and ensure fair compensation for partial losses.

• ### Q2: Is it possible to avoid the average clause by insuring your property for a higher amount?

Ans: Insuring your property for a higher amount might result in a greater claim amount in the event of a partial loss, but it's essential to do so accurately and transparently. Overvaluing the property to manipulate the claim amount can lead to policy violations and potential denial of claims. To avoid such issues, it's crucial to genuinely assess the property's value and ensure it is adequately covered.

• ### Q3: Is there any circumstance where the average clause might not apply, even if the property is underinsured?

Ans: Certain insurance policies include endorsements or clauses that modify the application of the average clause. Sometimes, the average clause may not be strictly enforced for specific high-value items or specialized coverage. To understand when the average clause might be modified or excluded, it's essential to carefully read your policy documentation and consult your insurance provider.

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