Superquote Terms: Condition of Average / Principle of Average

This insurance term relates to underinsurance.  It is a condition of most insurance policies and a standard market consition (normally).  It essentially means that in the even of an insured being under-insured, any claim will be scaled down in direct proportion to the under-insurance.

It is easiest to explain it through an example.

Lets say John has his landlords insurance policy for the building on a let property.  He has underinsured the rebuild cost.  The sum insured is £175,000 but the true rebuild value is £200,000.  The condition of average means that if he were to make a claim for flood for £20,000 of damage, the insurer could pay out just £17,500 which is directly in proportion to the level of underinsurance John has on the building.

Many policyholders are caught out by underinsurance and do not understand the priniciple of average.  Insurers essentially are calculating the cost of cover based on the full risk and full exposure they face.  By underinsuring a property, it is not a cost effective way of bearing some risk yourself.