What is the ‘average clause’ and what does it mean for your insurance?

When you take out a home insurance policy, it’s important that you don’t underestimate the rebuild cost of your home or the value of your contents, either mistakenly or on purpose.

If you do, you’ll be underinsured and run the risk of having the ‘average clause’ applied to any claim you make.

When this clause is applied to a claim, you’ll receive a much lower payout.

So it’s important to be certain that you insure your home and contents for the right amount.

What is the average clause?

In the small print of some home insurance documents, you’ll find mention of the average clause or ‘the condition of average’.

This clause means that if the insurer discovers that the sum insured on your policy is less than the actual value of your contents or the rebuild cost of your property, then they can reduce their payout to you when you claim.

The clause is there to try to ensure customers accurately declare the true value of their contents and property, so that they pay the correct premiums.

What exactly does it mean to be underinsured?

If you’re underinsured, you run the risk of being unable to claim for the true and total cost of any losses you incur.

When you take out home insurance, you’ll estimate the value of your contents and the rebuild cost of your home, your provider will then calculate the price of your premiums based on that sum.

However, if you subsequently lost everything in a house fire and found that the actual cost to replace your possessions or rebuild your home was higher, then you’re underinsured.

Your insurer wouldn’t be liable to pay out for the actual amount, in fact it will be significantly less.

For example, if you estimate the rebuild cost of your home is £500,000 but the true rebuild cost is £1 million, then your insurer would only have to pay out a maximum of £500,000 if your home was destroyed, half of the amount it would actually cost.

How does the average clause work?

In cases where you’re underinsured, the average clause is used to make sure you won’t receive a full payout when you’ve only paid part of the premium you should have been paying.

It means insurers can reduce the amount they pay out by the same proportion as the person is underinsured.

So, as in the example above, if you insured your home for £500,000 (when in reality, it would cost £1 million to rebuild), then you’re underinsured by £500,000 or 50%.

If you made a claim for £100,000 worth of fire damage to your home, you may think that, because you insured your home for £500,000, you’d be eligible to receive the full £100,000 payout.

However, under the average clause, your insurer would only pay out 50% of the £100,000 fire damage claim (£50,000), because you were only insured for half (50%) of the total rebuild value.

The insurer was, in effect, only getting half the premiums they should have been receiving from you to fully cover the building. So consequently, you’ll only receive half the amount of your claim.

How does underinsurance differ from overinsurance?

If you’re over insured, it means you have excessive insurance for your needs.

So, for example if your home contents policy offers a £50,000 limit of cover, but your belongings amount to only £20,000, then you’re over insured by £30,000.

You’ll be paying more than you need to for cover you don’t need. This is pointless, so speak to your insurer and provide them with an accurate estimate of your rebuild cost and contents value.

How can underinsurance be avoided?

Although some people take the risk and knowingly underinsure themselves to save money on their premiums, in many cases, people unwittingly underestimate their property’s rebuild costs and/or the value of their home belongings.

In the case of buildings insurance, you need to provide your insurer with the cost of rebuilding your home from the ground up - not the cost of the property as it stands.

This figure should include the cost of demolishing and clearing away the property and rebuilding it to its existing design and specification.

If you’ve recently bought your home, you can usually find the rebuild cost on your mortgage valuation or the deeds to your home.

If not, the residential rebuilding cost calculator from the Building Cost Information Service (BCIS) can help you work out the cost.

If you live in a flat, a listed building, a house that’s not made from standard materials or a home that has special architectural features, you may need the advice of a chartered surveyor. Take a look at the Royal Institution of Chartered Surveyors to find one near you.

Remember to update your policy’s sums insured if you’ve had any renovation or extension work done at your home.

How do I work out how much my contents are worth?

To get an accurate figure, you’ll need to go from room to room in your home and calculate how much it would cost to replace all your possessions.

You’ll need to factor in everything from your carpets and curtains to your furniture, personal items and kitchen appliances.

Don’t forget to include items in your garden sheds and garage, too.

Our home contents calculator can help you do this.

Remember to review your contents insurance regularly, especially after purchasing big items. Get regular valuations for expensive artwork or antiques, in case they’ve shot up in value.

What if there’s no average clause in the policy?

Even when there’s no average clause, the maximum an insurer will pay out will be the sum insured for your particular policy.

So, if you lost £40,000 worth of contents in a flood and were only insured for £20,000, your insurer will only pay out a maximum of £20,000.

What are single-item limits?

Contents insurance policies have a maximum amount they’ll pay out on any individual item. This will depend on the policy but is usually around £1,500.

If you have items worth more than the single-item limit of your policy, you’ll need to let your insurance company know about them so they can be listed separately.

This will push up the cost of your premiums, but it’s vital you don’t hide anything from your insurer.

For example, if you needed to make a claim for an engagement ring that cost £1,500 and the single-item limit on your policy was £1,000, unless you told your insurance provider about the ring and listed it separately, the maximum they’d pay out would be £1,000, leaving you £500 out of pocket.

What else do I need to consider?

If an insurer reduces your claim because they’ve applied the average clause and you think you’ve been treated unfairly, you can go through their complaints procedure.

If you remain unhappy with their decision, you can take your complaint to the Financial Ombudsman Service, a free service that helps resolve disputes in the financial services sector.

In some cases, the Financial Ombudsman may decide the insurer was unfair to use the average clause when deciding your claim. For example, if they hadn’t clearly explained and highlighted the consequences of providing incorrect figures.