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Media, Arts & the ‘Application of Average’ trap
by La Playa on May 27th, 2014
So the worst has happened and you need to make an insurance claim. The good news is that the incident is covered under your policy. And the bad news? Well, insurers have advised that your policy is not going to pay out the full amount of your loss even after the policy excess has been deducted. How can this be? Read on to find out how to avoid being hit by the application of ‘Average’ clauses.
Your insurer has advised that your policy is not going to pay out the full amount of your loss even after the policy excess has been deducted. So how can this situation arise? The answer lies in your policy conditions – in particular the ‘Average’ clause. If this clause is applied by insurers in the event of a claim, it means that where the sum insured is inadequate (i.e you’re under-insured), the insurer can reduce its liability for a claim by applying a proportionate approach.
The sum to be paid out is usually calculated as follows:
True value at risk X loss = claim sum to be paid
So for example: Your property is worth £100,000. You insure it for £80,000. You suffer a loss of £5,000. If your policy is ‘subject to average’, the maximum amount you recover will be £4,000.
So how can you prevent this happening to you?
• Review your sums insured on a regular basis – always at renewal and certainly when you’ve made significant purchases or alterations to your business
• Most property policies are now on a ‘reinstatement as new’ basis of cover, so make sure the sum insured reflects this, and not your discounted book value
• Don’t forget that it’s not just property polices that are ‘subject to average’ – this clause also applies to business interruption, goods in transit and cancellation policies.
Finally, why do insurers make their policies subject to this clause? The answer is simple: they need to make sure they receive the right level of premium for the risk they’re being asked to undertake.
If you’d like to talk this through, just get in touch – our advice is always free and without obligation.
RACHEL HOLMES: MEDIA, ARTS & ENTERTAINMENT
T: 01223 200656
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