When taking out a household insurance policy, consumers tell the insurer the value of the buildings or contents they want to insure. Following a household insurance claim, the insurer sometimes decides that this amount - the "sum insured" - is not enough to cover the full value of the claim. This is referred to as "under-insurance".
In these circumstances, the insurer may choose to "apply average" to the claim under an "average clause". This means that where the sum insured is inadequate, the insurer can reduce its liability for a claim by applying a proportionate approach. The sum to be paid out is usually calculated as follows:
|sum insured true value at risk||x||loss||=||claim sum paid|
Although average clauses are common in household policies, not all policies will have one. We occasionally see complaints where insurers have tried to apply average to a claim when there is no average clause in the policy.
Occasionally, an insurer states that the consumer failed to disclose the true replacement cost of their contents or the true rebuilding cost of their home. It might then choose to “avoid” the policy from inception - that is, cancel it by refunding all premiums paid and possibly look to recover any money paid out under previous claims.
In either situation, we would need to look carefully at the circumstances of the case to decide if the insurer has acted fairly or not.
Before offering cover, an insurer usually wants to know the replacement cost of the contents of a property and/or the cost of rebuilding the property. It does this so it can assess the risk it is taking on before giving a quote. In general, insurers rely on the figures provided by the consumer - rather than visiting the property themselves.
But in general, consumers are unlikely to be experienced in calculating such costs - so it can be difficult for them to estimate the value of their contents. And estimating the cost of rebuilding a property would be particularly difficult unless the insurer had provided detailed information explaining how a non-expert could calculate the amount. We bear this in mind when considering complaints about under-insurance.
We will also find out the questions the consumer was asked when they started or renewed their policy so we can determine what information the insurer asked for.
When applying for contents insurance, a consumer might be asked “what is the total value of contents held at your property?” Alternatively, they could be asked “how much cover do you require?” or “what sum insured do you require?”
The same consumer could answer these questions in very different ways: the first is asking about the total value of the items at risk in the property, while the other two simply ask how much the consumer wants to insure.
So a consumer might own contents at their property which would cost £50,000 to replace if they were lost. But they may only seek insurance cover of £30,000 because they think it is unlikely they will suffer a loss of more than £30,000 following one insured event.
If an insurer did not ask the consumer to state the replacement cost of their entire contents, we are unlikely to agree that it is fair to apply the average clause on the basis that the consumer did not disclose this amount. Neither would we think it fair for the insurer to use either misrepresentation or non-disclosure as a reason to avoid the policy or reduce the claim payment.
Here too, there are various ways an insurer could ask a consumer the same question - ranging from:
When we consider a complaint, we will look at whether the question asks for the specific information the business wants to know - and also at how helpful it is for the consumer:
We also need to assess what additional guidance the insurer gave the consumer for completing the application. We will ask:
If the answer to any of these questions is no, it is unlikely we would consider it fair for an insurer to apply average or take any other action - such as avoiding the policy or adjusting the claim.
Some online applications automatically generate the sum insured amounts based on the answers provided by the consumer to questions like “how many bedrooms does your property have?”
If this was the case, we would look at whether the insurer had made it clear that the consumer needed to review all pre-filled parts of the online application form about the sum insured. The consumer should have been advised to make sure the amount on the form would cover the full replacement cost of their contents.
If the insurer has done this, we are likely to agree that it is fair for the insurer to apply the average clause.
Under many policies, the sum insured is index-linked in an attempt to keep it adequate and in line with inflation. We will look at whether the insurer has applied index-linking where appropriate and we will check it has done so when considering a complaint.
If the insurer did not ask the consumer to give an estimate of the full amount at risk - or did not explain that it required this amount - we will generally say that it is not reasonable for the insurer to apply the average clause.
Instead, the insurer should deal with the claim up to the policy limits in place - as long as any relevant limits were drawn to the consumer's attention at the start of the policy or at renewal.
We will usually decide it is reasonable for the insurer to apply the average clause if the consumer was:
If the consequences were not clearly explained and highlighted, we are unlikely to decide that it was fair for the insurer to rely on the average clause. But it could rely on the sum insured as a total limit or on specific limits if these were clearly pointed out.
To reduce the claim amount, insurers sometimes apply average to a claim where the consumer is under-insured - even though the policy does not contain an average clause. We do not think this is fair or reasonable. We generally take a strict approach of “no policy term = no average”.
Where the insurer did not ask a clear question (see “setting the sum insured”) or the consumer estimated the value at risk to the best of their knowledge, we take the view that it is unfair for the insurer to avoid the policy or pay an averaged settlement.
Instead, we will tell the insurer to settle a valid claim up to the stated sum insured or relevant policy limits - for example, a single article limit (if these were drawn to the consumer’s attention).
In some cases, we can see the consumer was asked a clear question. So they knew they needed to estimate the full replacement cost of their contents or the full rebuilding cost of their home - but still provided the wrong figure without taking reasonable care. Here, we are likely to agree that the insurer can settle the claim proportionately.
Technically, the insurer would need to make clear it had based its decision to settle in this way on a misrepresentation at the start of the contract. But we will take a pragmatic view. In cases of careless misrepresentation, we will generally support an insurer if they suggest settling a claim proportionately - even if there is no average clause in the policy.
There may also be situations where the insurer would have attached conditions or endorsements to the policy (for example, keeping items in a safe or fitting an alarm) if they had known the true value at risk.
We are unlikely to think it fair for an insurer to retrospectively add conditions or endorsements into a policy unless we are satisfied that:
We would look at whether the consumer’s position has been “prejudiced” - that is, whether or not they would have taken out the policy if it had included the extra conditions or endorsements from the outset. If we think they would have done, we are likely to say no prejudice exists and the insurer can assess the claim in the usual way as if the condition or endorsement was in force.
If the consumer deliberately misrepresented the sum insured, we are very likely to support the insurer settling the claim proportionately - or avoiding the policy in certain circumstances.
We are only likely to support this resolution if there is compelling evidence that fraud has been committed. For example, there may be evidence suggesting that the consumer deliberately and significantly under-insured to obtain a lower premium.
Our online technical resource on misrepresentation and non-disclosure provides more detail about our approach.
If there is an average clause in the policy in question, we will take this into account. But we are generally likely to expect average to be applied before any policy limit. Otherwise the insurer is effectively reducing the limit to a lower amount when it expected to pay up to the amount stated.
Policy limits are usually a reflection of the level of premium paid by the consumer. So although stating the correct sum insured is likely to lead to higher premiums, it is also likely that the policy limits will increase to reflect the higher premium being paid.
Insurers expect consumers to review their sums insured for contents and buildings when they renew their policy. When deciding an individual case, we will look at how clear the insurer made it to the consumer in renewal documentation that this was necessary - and also whether the insurer made clear the consequences of not doing so.
If this requirement was clear but the consumer still failed to check their sums insured, we may well support the insurer applying average or a proportionate settlement in the event of a claim.
contact our technical advice desk on 020 7964 1400