Condition of average

Everyone likes to save money, but when it comes to insuring your most valuable assets saving a little now can cost you a great deal later if your insurance doesn’t reflect the true replacement value of your home and its contents and you suffer loss or damage.

The basic principle of home and contents insurance is it lets a large group of people pool their money to cover against the possibility of loss or damage so the few people who actually suffer misfortune can draw from that pool to repair or rebuild.

Your insurance rate is set on the premise that the Insurance Company is insuring the whole building, not just the part most likely to be damaged. It follows if the sum insured is less than it should be to fully rebuild your home or to replace your belongings at today’s prices, you are determined to be under-insured. You’re not making a fair and sufficient contribution to the insurance pool and any recovery from the pool must therefore be in proportion to the amount contributed.

Your policy includes an Average Clause which is standard for the industry. It determines the rate at which your claim may be reduced. For example, if you insure a building for $500,000 and the actual cost of replacing the building at current rates is $600,000, you are under-insured by $100,000 or 16.67% of the actual reinstatement value. Any claim you make will therefore be reduced by this percentage and you are determined to be self-insured for the difference.

Using this formula, if you suffer partial damages valued at $60,000, for example, your claim settlement will be reduced by $10,000 (16.67% of $60,000), and could be further reduced by policy deductibles. You will receive a maximum settlement of $50,000 and will be out-of-pocket for the remainder.

It’s an unfortunate fact that most people who under-insure simply underestimate the true value of their home and contents or they fail to recognize the rising replacement value of their property over time and don’t increase their policy accordingly.

The basic sum you insure needs to be established correctly to avoid the application of the Average Clause in the event of a loss. We recommend a professional valuation or appraisal be carried out whenever you’re taking out a new policy or renewing an existing one. Your N.U.C.A. agent can help you in getting in touch with an independent appraiser.

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