What is the name of the clause that states that the insured will act as their own insurer for the difference between the actual and declared values?

The average clause is significant in insurance contracts, especially in property insurance. It applies when there is underinsurance; that is, when the declared value of the insured property is lower than its actual value. According to this clause, in the event of a loss, the insurer only pays a proportion of the claim based on the ratio of the insured value to the actual value.

For example, if the actual value of a property is £100,000, but the insured value is declared at £80,000, and a loss occurs resulting in a claim of £20,000, the insurer will only cover 80% of that claim, which amounts to £16,000. Therefore, the insured effectively bears the financial impact of the underinsurance, acting as their own insurer for the difference.

This clause highlights the importance of accurately declaring values to ensure that adequate coverage is in place, helping both insurers and insured parties to manage risk effectively. Understanding the implications of the average clause can help insured individuals recognize the necessity of having their property valued correctly to avoid potential losses in the event of a claim.