Buildings insurance – What is the ‘average clause’ and how does it work?

Average clause in buildings insurance

The average clause is an aspect of buildings insurance that, as well as causing confusion, can also cause real problems in terms of setting sums insured on buildings and claims disputes with insurance companies.

To help explain the average clause in more detail we’ve put together the below guide. If you have any questions or need help with your council buildings insurance, contact us today.

What is the average clause?

An insurance policy is effectively a contract between two parties, the insured and the insurer, and like all contracts there are certain clauses and conditions associated with it.

When insuring a building there is one clause in particular that is important to understand as it can significantly affect the amount paid out if you make a claim. This is known as the ‘average clause’, which means you, as the insured, are required to bear a proportion of any loss if your assets were insured for less than their full reinstatement value.

When you insure a building, it is your responsibility to decide how much to insure it for i.e. what would the cost be to rebuild the property from scratch, including fees etc. Your insurance company will use this information to decide how much you pay in premiums for the cover.

So as an example, let’s say you insure your building for £500,000, but the amount you should have insured it for – i.e. the expected full rebuild cost – is actually £1,000,000. Your insurance company will subsequently only be receiving half of the premiums they require to fully cover the building, so they wouldn’t be expected to pay out the full £1,000,000 if the building is completely destroyed.

The average clause is therefore the insurance company’s way of making sure you only get what you pay for – which also applies to smaller claims. As another example, let’s say a tree falls into your building which causes £5,000 worth of damage. You may think that because you have insured the building for £500,000 then this claim would be fully covered.

However, because the building has been ‘under insured’, the average clause will apply when you make a claim and, in our example, you would only receive £2,500 for this claim – as the building has been insured for half of what it should have been so you would only receive half of the claim value as a pay-out.

We have made the above example very simple, but the way the average clause could be applied can be much more complicated and lead to a lot of stress when it comes to making a claim. The only way to avoid the average clause is to make sure your buildings are insured for the right amount when you take out your policy.

If you would like a free review of your current council buildings insurance, contact BHIB Councils Insurance now.

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BHIB Councils Insurance provides specialist insurance solutions for Local and Parish Councils. As part of BHIB Insurance Brokers, we have been delivering professional insurance and risk management guidance to our customers for over 50 years.

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