Average Clause / Coinsurance Clause (US Market)

Purpose

In the US property insurance market, the coinsurance clause (also known as the “average clause”, functionally comparable to the German-language underinsurance rule) requires the policyholder to insure the property to at least a percentage of its actual replacement value specified in the wording – commonly 80%, 90% or 100%. In return for meeting this minimum insured amount, the policyholder receives a premium discount, since the insurer assumes a lower probability of systematic underinsurance across its book.

Effect and limits

If the required minimum insured amount is not met, the insurer applies the coinsurance formula: the indemnity is reduced in proportion to the ratio between the amount of insurance actually carried and the required minimum amount, multiplied by the amount of the loss. This reduction, known as the “coinsurance penalty”, applies even to partial losses, not only in the event of a total loss, which makes its practical effect similar to, though its calculation method distinct from, the classic German-language underinsurance rule. To avoid this risk, many insurers offer “agreed value” endorsements that suspend the coinsurance test for the policy period.

Negotiation and practice

Policyholders should have the insured amount reviewed regularly against current construction and replacement costs, since rising construction prices can quickly result in unintended underinsurance. In negotiations, policyholders frequently seek a waiver of the coinsurance clause or an agreed value endorsement to eliminate the risk of a subsequent reduction in the event of a claim.

Jurisdictional comparison

The US coinsurance clause is functionally equivalent to the underinsurance rule under German-language law (sections 75 et seq. of the German VVG, or Article 62 et seq. of the Swiss VVG), but differs in its calculation formula and in that it is typically drafted as a distinct, explicitly negotiated contract clause rather than a statutory default rule.