Under-insurance and the Average Clause
Why a €400,000 house insured for €300,000 does not get €300,000 of repairs paid.
The clause most people have never read
Nearly every Irish property policy contains a condition of average. It provides that if the sum insured is less than the full value at risk, the insurer pays only the same proportion of your loss as your sum insured bears to the true value. It applies to partial losses, which is to say almost all losses, and it is applied arithmetically rather than as a matter of judgement.
How it works in practice
The formula is straightforward. Settlement equals the loss multiplied by the sum insured divided by the true reinstatement value. Take a house that would cost €400,000 to rebuild but is insured for €300,000, and a fire causing €80,000 of damage. The sum insured is 75 per cent of the true value, so the insurer pays 75 per cent of the loss: €60,000. You fund the remaining €20,000 yourself, despite being insured for a figure far above the damage. That surprises people, and it is the single most common cause of a shortfall we see.
Rebuild cost, not market value
The value at risk is what it costs to rebuild, including demolition, site clearance, scaffolding, professional fees, compliance with current building regulations and VAT. It is not what the house would sell for. Construction costs in Ireland have risen sharply, and a sum insured set five or six years ago and increased only by an index-linking percentage is very likely short today. The Society of Chartered Surveyors Ireland publishes rebuilding cost guidance by region, and it is worth ten minutes at renewal.
Contents are worse
Households under-insure contents more often than buildings, because valuing them requires walking through the house room by room and totting up what it would cost to replace everything. Most people guess low. The same average clause applies, so a burglary claim on a house with contents insured at half their value is paid at half.
Commercial and business interruption
On commercial policies average applies to buildings, stock, plant and to business interruption sums insured. Because business interruption sums are calculated from the policy definition of gross profit rather than the accounting one, under-insurance there is common and the proportionate reduction is applied to an already substantial figure.
What to do about it
Review sums insured at every renewal against current rebuild costs, not last year’s figure plus inflation. If you are already in a claim and average has been raised, the true reinstatement value is a matter of expert opinion and is open to challenge — insurers’ figures are not automatically correct. We deal with average arguments regularly. First consultation free — 085 268 7871.
Dealing with a claim right now?
The first consultation is free and there is no obligation. Call 085 268 7871 or send us the details of your claim.
Call 085 268 7871