In what scenario might the average clause apply?

The situation where the average clause applies typically involves the scenario where the insured amount is less than the actual value of the property being insured. The average clause is designed to discourage underinsurance by ensuring that policyholders insure their property for an adequate amount.

When the insured value is lower than the actual value, the insurance company can invoke the average clause at the time of a claim. This means that in the event of a loss, the insurer will only pay a proportionate amount of the claim based on the ratio of the insured value to the actual value. For example, if a property worth £100,000 is insured for only £60,000, the insurer may only pay 60% of any loss incurred. This mechanism serves to encourage policyholders to take appropriate care when determining the value of their insured items, ensuring adequate coverage is in place to fully protect against potential losses.