Sum Insured Equalisation Clause
The sum insured equalisation clause offsets excess sums insured on one position within the same property policy against underinsured positions, so that no pro-rata reduction for underinsurance is applied.
- Clause type
- Condition
- Origin/Market
- DACH – statutory
- Favours
- Insured
- Negotiability
- Market standard
Purpose
Bundled commercial property policies often insure several positions – for example buildings, business equipment and stock – each with its own sum insured. Because the values of these positions develop differently over time, one position can easily become over-insured while another is under-insured at the same moment. The sum insured equalisation clause offsets such excess sums against underinsured positions within the same contract, preventing a pro-rata reduction of the claim payment.
Effect and limits
The allocation is based on the ratio by which the insured value of each position exceeds its sum insured, regardless of which position is actually affected by the loss. The positions remain legally separate: a position that is adequately insured cannot itself be pulled into underinsurance through the equalisation mechanism. Stock covered on a declaration basis and sums insured on a first-loss basis are typically excluded from the equalisation. Where separate sums are agreed for several insured locations, equalisation only operates between the positions at each individual location.
Negotiation and practice
The clause is particularly suited to businesses with heterogeneous assets whose individual valuation is costly or uncertain. Before inception it is worth checking exactly which positions the equalisation covers and whether declaration-based stock or first-loss sums limit the expected protection. In practice, sum insured equalisation is no substitute for careful valuation, but it does reduce the risk of minor valuation discrepancies between positions.