"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.