22/01/2026
Why “Average” and Underinsurance Matter More Than You Think
In insurance, two of the most misunderstood—and financially dangerous—concepts are Average and Underinsurance. They are often dismissed as technical fine print, yet they can determine whether a claim restores your position or leaves you carrying a substantial shortfall.
What Is Underinsurance?
Underinsurance occurs when the sum insured on a policy is less than the true replacement or reinstatement value of the asset at risk. This is common where values have not been reviewed regularly or where costs have escalated due to inflation, supply-chain pressures, labour increases, or regulatory changes.
Importantly, underinsurance does not only matter when there is a total loss. It becomes critical even on partial claims.
What Is the “Average” Clause?
The Average clause is a standard condition in most property and asset policies. It allows the insurer to reduce a claim proportionally if the asset is underinsured at the time of loss.
In simple terms, the insurer treats you as self-insuring the uninsured portion.
Example:
True replacement value of building: R10 million
Sum insured: R7 million (30% underinsured)
Claim for damage: R1 million
Because the building is insured for only 70% of its value, the insurer may pay only 70% of the claim:
Insurer pays: R700,000
You pay: R300,000 (out of pocket)
This applies regardless of how small or large the claim is.
Why This Catches People Off Guard
“I’m paying a premium, so I’m covered.”
Premiums are based on the sum insured—not the actual value. A lower premium may simply mean lower cover.
“It wasn’t a total loss.”
Average applies to partial losses too, not only catastrophic events.
“Values haven’t changed much.”
Construction, professional fees, demolition, and compliance costs often increase quietly and significantly over time.
“My policy hasn’t changed.”
That is precisely the risk. Static sums insured in a dynamic cost environment almost guarantee underinsurance.
Where This Is Especially Risky
Buildings (commercial, sectional title, schools)
Machinery and plant
Business interruption (where inadequate asset values directly reduce loss-of-profit claims)
Contents with fluctuating replacement costs
How to Protect Yourself
Review sums insured annually—not only at renewal, but after upgrades, extensions, or regulatory changes.
Use professional valuations for buildings and high-value assets.
Apply adequate escalation factors between valuations.
Understand your policy wording, particularly how Average is applied.
Work with a broker who actively challenges and stress-tests your cover, rather than simply renewing it.
The Bottom Line
Average is not a penalty—it is a mathematical consequence of underinsurance.
The real risk is assuming it will never apply to you.
In practice, the most expensive insurance mistake is not paying too much premium—it is paying too little for the cover you actually need.
