What the jiggins is the Average Clause?

You insured your business. You paid your premium. You made a claim. And you got back half of what you expected. Completely legally.

Welcome to the average clause. It's been sitting quietly in your commercial policy this whole time, biding its time. Waiting for the right moment to strike.

So what is it?

The average clause is built into most commercial insurance policies, and it’s job is to reduce your payout if you're under-insured at the time of a claim. This happens proportionately, based on how much they believe you were under-insured.

It doesn't care how the fire started. It doesn't care whether your claim is entirely legitimate. It cares about one thing: were you insured for what your stuff was actually worth?

If not, your payout gets cut to match.

The Maths

You insure your office contents for £500k. The premium on £1m felt a bit steep, so perhaps you decided that you'd be happy to take a lower payout based on your own risk tolerance. Insurance can feel expensive. We get it.

Then there's a fire (or whatever dramatic example you’d like to use). You lose £250k worth of equipment and put in a claim.

Your insurer applies the average clause. You were insured for 50% of the actual value, so they pay 50% of the claim.

You get £125k.

The formula is straightforward: insured value ÷ actual value × claim amount = payout. Your insurer is legally entitled to apply it, and most will.

Legally speaking, why is this ok?

Your premium is calculated based on the value you declare. If you've declared less than the true value, you've been paying for partial cover. The insurer's argument is that you were effectively self-insuring the rest, and the average clause makes that explicit at claim time.

It's a long-standing principle in dull UK insurance law, rooted in indemnity. You can only recover in proportion to the risk you actually transferred.

Here’s what Steven Darrah, REALLY HONEST Founder has to say about the average clause:

It’s really bloody sneaky.

There you have it.

Where it catches businesses out

The most common cause isn't a deliberate decision. It's a valuation that was done when the policy was first taken out and never revisited.

Businesses grow. They buy equipment. They fit out new offices. Three years later the declared value looks woefully inadequate, and nobody thought to update it because nothing felt like it had changed dramatically.

(If only there was an insurance broker than checks in regualrly about these things)

Inflation can play a part here too, by the way! The cost to replace or reinstate assets has risen significantly in recent years. A valuation that was accurate in 2021 is very likely not accurate now. Keep an eye on it.

What you can do about it

No business owner/operator wants to give themselves more work… but get an up-to-date reinstatement valuation. For property and contents, this should reflect the actual cost to replace everything, not the original purchase price or book value.

Review it at every renewal, not just when something significant happens. A good broker will prompt you. If yours isn't, that's something to think about.

And if you've grown significantly mid-term, don't wait. Tell your broker. Adjusting your cover costs less than finding out you're under-insured during a claim.

The REALLY HONEST takeaway

The average clause isn't a loophole. It's a contractual term that does exactly what it says (on the tin. Do people still say that?). The problem is that most policyholders have never heard of it, and find out about it at the worst possible moment.

Know what your assets are actually worth. Make sure your policy reflects that. And if you're not sure, ask your broker before you need to make a claim.

That is quite literally what we are here for.