What is the 'average clause' in household insurance?

The average clause in household insurance is designed to address situations where the insured amount is less than the actual value of the insured possessions. When a policyholder underinsures their property, the average clause stipulates that the insurer will not pay the full amount of the claim. Instead, if a loss occurs, the payment will be adjusted proportionally based on the level of underinsurance.

For instance, if a homeowner has insured their property for £150,000, but the actual value is £200,000, in the event of a claim, the insurer would only cover 75% of the loss. This approach encourages policyholders to insure their property appropriately to avoid financial loss at the time of a claim.

This clause serves as a protective measure for insurers, ensuring they are not paying out claims that exceed the proportionate amount of the insurance coverage in relation to the true value of the goods or property insured. Understanding the average clause is crucial for homeowners to ensure they maintain adequate coverage for their possessions to mitigate potential losses.