Introduction
Average insurance falls among the terms and conditions to an insurance policy which stipulates that the insured is his own insurer on the difference between the sum insured and the actual market value of a risk when claiming. Average insurance is applied if the market value or retail value of an insured item like motor vehicle is higher than the sum insured when settling a partial loss claim. It is avoided by adequately insuring your assets.
History
Average insurance was introduced by short-term insurance companies in direct response to escalating values of property visa vie the premium paid on the inception of the policy. This condition addresses the gap that would exist between the value of an insured asset on the inception of the policy and its value when a claim arises. In economies where prices sky-rocket, insurance companies lose a lot of money if this condition is not applied because the cost of replacing the same item would have gone up even more than twice by the time of claiming.
Features
Insurance companies apply the average insurance condition when settling partial loss claims. The formula for calculating average is given as the sums insured divided by the market/retail value and multiply by the amount claimed. If you are claiming $3 000.00 damages to your motor vehicle which is insured for $8 000.00, the insurance company will calculate the net claim before deducting any excess as follows,
$8 000.00 (Sum insured) x $3 000.00 (repair costs)
$13 000.00 (Market/Retail value) = $1 856.13 (gross claim)
The amount that will be paid by the insurance company after applying average insurance is $1 856.13 less any applicable excesses. In most cases insurance companies an 80% margin before applying average, meaning that it is applied if the insured value is less than 80% compared to the market value.
Average insurance is used by insurance companies as a way of penalizing you for under-insurance. In such a case it is important to constantly valuate your property and increase the insured values to reflect the true market values. The average condition is applied when settling partial loss claims, meaning that you may not be aware of this clause until you claim. In this case it is important to read through your insurance contract before signing off in order to avoid the common saying of labeling insurance companies as thieves who does not want to pay claims.
How to avoid average insurance
Average insurance condition is easily waived by insurance companies if you do not under-insure your property or undertake to increase the insured values of your property on regular basis say on quarterly basis and pay the additional premium. Under this agreement, the insurance company will waive the average clause and all partial losses will be paid in full. The insurance company will also evaluate your property after every four months for free. Average insurance is mainly a problem in unstable economies and you may not enjoy the advantages of insurance if you are underinsured. It is basically applied to partial loses, thus the concept of indemnity is non-existent because the money paid out by the insurance company will not be able to fully cover the repair costs.
