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What is an Averaging Clause?

Where the insured person has taken out a policy on property, the insurance policy may stipulate that it is subject to an average. This clause is intended to prevent under-insurance, which causes a loss of premiums to the insurer. Under-insurance by one insured person effectively works against the interests of other policy holders, unless there is an averaging clause. Such a clause may, however, work as an injustice in times of high inflation. The following example will explain the effect of a ‘subject to average’ clause.

The policy holder may have insured the contents of their house for $15,000. The actual value of the contents is $30,000. There is a fire which destroys $15,000 worth of goods. At common law the insured is entitled to receive $15,000, as this is the loss suffered. However, if there is a ‘subject to average’ clause, the insured will only be able to recover $7,500, as they have only insured the goods for half their value.

‘Subject to average’ clauses are fairly common in house and contents policies. Some insurers will exclude, or not enforce, ‘subject to average’ clauses where the insured has taken out a policy on 80% of the value of the goods. It is best, therefore, to regularly check the value of the goods insured, and increase insurance cover if necessary.

Insurers and brokers have been known to encourage people to insure property for more than its full value. In this way, they obtain higher premiums and commissions and, since the policies are usually indemnity policies, they do not incur any greater liability. In travel insurances especially, brokers tend to take a rather sanguine view of the value of the property insured. Needless to say, when the claim is lodged, the insured may be required to prove the value of every item claimed.

What is a Cover Note?

People usually want to be covered by their insurance from the time they fill in the proposal form. It takes time, however, to prepare the policy documents. As proof that the insured is covered in the interim, insurers usually issue a ‘cover note’ which is valid for a specified period of time.

These are usually issued as soon as the proposal application is completed, before the issue of the policy documents. If the insurer decides not to accept the proposal, they can give notice to the proposer, and go ‘off risk’, even though a cover note has been issued and the premium paid. (Some policies provide that liability can be avoided by the insurer if the premium was unpaid at the time of loss or damage).

Cover notes seldom contain any policy conditions, and it is wise to ask for a copy of the policy document before paying the premium.

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