Please note that any property that is insured or to be insured is subject to thecondition of average (Average Clause). This means, if the property covered under your policy is, at the time of any loss or damage from an insured peril, of greater value than the sum for which the property is insured, you will only be entitled to recover under this policy such proportion of the loss as the sum insured under this policy bears in relation to the total value of the property. You are said to be under-insured because the sum insured at the time of the loss is less than the actual value of the insured property and so a part of the insured loss will not be covered under this Policy. In this case, you are considered as being your own insurer for the part of your loss which is not covered under this policy.
For example, should you have a property, which has a value of $1,000,000 and you decide to insure it for $800,000 and you suffer a loss from an insured peril, there are three possible scenarios
Example 1 Where loss is less than value and less than Sum Insured
Loss is $500,000
Insured for $800,000 and the value of the property is $1,000,000
The amount that the isurers will be liable to pay is calculated as 800,000 divided by 1,000,000 multipied by the loss which is 800,000/1,000,000 X $500,000= $400,000. less any deductible stated in the policy.
Example 2 Where loss is less than value but greater than Sum Insured
Loss is $900,000
The amount that the isurers will be liable to pay is calculated as 800,000 divided by 1,000,000 multipied by the loss which is 800,000/1,000,000 X $900,000= $720,000. less any deductible stated in the policy.
Example 3 Where loss is equal to replacement value
Should you have a total loss that is, $1,000,000 then you will only receive the amount you
insured the property for that is $800,000 less any deductible stated in the policy.
Under certain circumstances where you under-insured, you may be entitled to the full amount of the insured loss if the sum insured is equal to or more than 85% of the value. This will depend on the terms of your policy.
Please review the terms of your policy carefully, including checking on the adequacy of the sum for which the property is insured or to be insured. This will enable you to identify whether you are or will be under-insured in a manner which will cause the pro rata condition of average detailed in your policy to be applied. You may check with your insurer, agent or broker for further clarification on the terms of your policy and the nature and effect of the pro rata condition of average contained therein.