An average clause, also known as an “underinsurance clause,” is a provision commonly found in home insurance policies. It is intended to protect the insurance company from having to pay more than their fair share in the event of a loss.
The average clause states that in the event of a partial loss to a property, the insurer will only pay the proportionate amount of the loss that the amount of insurance taken out bears to the full value of the property. This means that if a policyholder has underinsured their property, they will only receive a percentage of the total loss proportional to the amount of insurance they have.
For example, if a policyholder insures a property valued at $500,000 but only insures it for $300,000, and a loss occurs resulting in $100,000 in damages, the insurer will only pay $60,000 (60% of the damages) according to the average clause.
It is important for homeowners to ensure that they have adequate coverage for their property to avoid being underinsured and facing financial loss in the event of a disaster.
In conclusion, to protect the insurance company, the average clause also serves as a reminder to policyholders to regularly review and update their coverage to ensure that it accurately reflects the current value of their property. This includes taking into account any renovations, additions or improvements made to the property, as well as changes in the local real estate market.