Ever heard of Co-Insurance or Average Clause in your Insurance Policy?
Don’t know what it means?
Co-Insurance also known the Average Clause is a common clause contained in most Commercial Property Insurance Policies. These policies insure your property for ‘Replacement Value’.
This means your policy is designed to replace claimed Property with new, even though it may be a number of years old. For this reason, it is extremely important that your Sum Insured reflects the true replacement cost of your property/items. Regardless of what you believe your property is worth based on its age and what you paid for it.
Policies typically include additional benefits, such as the cost to remove debris, architects and surveyors fees. Some policies provide cover for these benefits in addition to the sum insured, however some are only covered if your sum insured is sufficient to include these costs.
The Co-Insurance Clause is written into policies mostly to encourage clients to make sure they have a sum insured that is adequate to obtain the maximum protection from the policy. Of course, the greater the sum insured the higher the premium generally is. This can make it tempting to reduce the sum insured to save a few dollars on the premium.
Most policies allow a sum insured that is within 80% of the replacement value without the clause coming into effect. If the sum insured is below the 80% then it is deemed the policy holder is under insuring and ‘average’ is applied. Put simply, the % of your sum insured as it relates to the Replacement Value is applied. The effect of this can be catastrophic to any business.