The significant increases we have experienced in building costs have highlighted a concerning trend of underinsurance. Many properties are found to be insured for less than their estimated replacement value, leaving property owners at risk in the event of a significant loss.
But why is it so important? Some insurance is better than none, right? Let us explain one aspect that often causes confusion – the “Average Clause”
Co-Insurance, also known as the Average Clause, is a standard provision found in most Commercial Property Insurance Policies. This clause is designed to ensure that the insured parties adequately insure their properties for their full replacement value.
Let's take a closer look at an example to understand how the Average/Co-Insurance Clause works:
**Example 1:
- Sum Insured Under Policy: $3,200,000
- Estimated Replacement Value: $6,000,000
- Co-Insurance Percentage: 80%
- Loss: $480,000
- Amount Settled: $320,000 (less Excess)
In this example, the insured property suffers a significant loss and is deemed to be underinsured. As a result, the settlement amount is adjusted based on the Co-Insurance Percentage.
Now, let's consider a scenario where the insured holds a higher sum insured but is still deemed to be underinsured:
**Example 2:
- Sum Insured Under Policy: $4,200,000
- Estimated Replacement Value: $6,000,000
- Co-Insurance Percentage: 80%
- Loss: $480,000
- Amount Settled: $420,000 (less Excess)
Even with a higher sum insured, the settlement amount is still adjusted due to underinsurance, as per the Co-Insurance Clause.
It's important to note that under most commercial insurance policies, the Average/Co-Insurance Clause is typically not applied to losses that are under 10% of the total sum insured. In the above examples, this would be approximately $320,000 or $420,000 for Example 2.
Additionally, if the sums insured shown under the policy represent 80% of the actual correct replacement value, the Average Clause will not be applied. This threshold, known as the "Co-Insurance Percentage," may vary from insurer to insurer.
Understanding the implications of the Average/Co-Insurance Clause is crucial for property owners and managers. To mitigate the risk of underinsurance and ensure adequate coverage, it is recommended to work with experts like Asset Reports who specialize in accurate building replacement valuations for insurance purposes.
Protect your properties from the uncertainties of underinsurance. Contact us today to learn more about our comprehensive building replacement valuations and how we can help safeguard your assets.
