Under-insurance and the effect of the average clause on insurance contracts

Abstract

Under-insurance can have dire consequinces for insurers if they are held liable for the full value of the damage that occurred while an insured only paid small premiums in relation thereto. It has become common practice under insurers to insert an average clause into insurance contracts to protect themselves in instances of under-insurance. The average clause today is a standard term that forms part of insurance contracts that can have a negative effect on an insured if they are not aware of the clause and its consequences. An average clause entails that an insurer is able to evade full liablity for damages that occurred to an object of risk, where the insured was under-insured. The insurer will be held liable for only a proportion of the loss in relation to the proportion by which the insured was under-insured. The insured will be deemed his/her own insurer for the proportion by which it was under-insured. This dissertation evaluates the consequences that the average clause can have for an insured as well as the financial advisor of an insured in instances where an insured is not made aware that his/her insurance policy contains an averace clause. The research is conducted through the means of a literature study of the origin of the average clasue and what it entails as a standard form term for the insured and the finacial advisor. Various avarage clauses from different insurance policies are evaluated in this regard, and various items of legislation and case law are evaluated in order to determine the validity and consequences of the application of an average clause.