Average
The average clause used in insurance terms can be described as follows: “A situation in which the insurance company accepts liability only for the same proportion of a loss as the sum insured bears to the actual value of the property as calculated at the time the loss is experienced.” It means that the insured is required to bear a proportion of any loss where assets are insured for less than their full value. The term “average clause” is applicable where a risk is under-insured.
An example will explain the implication of the average clause in car insurance:
Your car is insured for R150 000 but the actual market value at the time you have an accident is R250 000. In the accident your car is damaged and you claim R20 000. The insurance company will pay you R12 000 = (R100 000 x R20 000) / R150 000 and you will have to pay the difference of R8 000. You were 40% under-insured and therefore you accepted the risk for 40% of any loss.
From the above you can see the importance of making sure that your car, or any other property for that matter, is insured for the correct value. It is the responsibility of the client, not the insurance company to confirm their insurance values on at least an annual basis to prevent under-insurance and its nasty implications.