"SUBJECT TO AVERAGE" CLAUSE

Indemnity policies such as houseowners and householders and fire policies may include a subject to average clause. This clause penalises the insured if he/she underinsures but the insurer must however, before the contract is entered into, clearly inform the insured in writing of the nature and effect of the provision   s44 Insurance Contracts Act 1984. Choice (6/03) found that 8 out of the 34 insurance policies surveyed had a subject to average clause. The principle is illustrated In the following example:

EXAMPLE:

Value of building: $1 000 000
Amount insured: $100 000
Damage caused by fire: $5 000

The payout by the insurance company is the ratio of the market value of the building to the amount insured:

100 000/(1000 000 * 80%) * 5 000 = $625

This formula operates where the insured amount is less than 80% of the value of the property   s44(3) Insurance Contracts Act 1984. Where the insurance is over the insured's residence and the insured amount is not less than 80% of the value of the property, the subject to average clause cannot operate solely on the basis that the insured has underinsured = s44(2) Insurance Contracts Act 1984.