Underinsurance – Average Clause

Purpose

The sum insured forms the basis for premium calculation and simultaneously caps the insurer’s maximum liability. If the policyholder chooses a sum insured markedly below the actual insurable value, full indemnification up to the amount of the loss would leave the insurer bearing a risk it never priced and for which it never received a corresponding premium. The average clause restores this link between premium and benefit.

Effect and limits

On a claim, the indemnity is reduced in the proportion that the sum insured bears to the insurable value at the time of loss; at a cover ratio of, say, 60 per cent, even partial losses are indemnified only at 60 per cent. The rule is non-mandatory and can be excluded by contract through a waiver of underinsurance or a first-loss basis of cover.

Negotiation and practice

Because valuation – particularly for buildings, machinery and stock – regularly carries uncertainty, insurers often require the sum insured to be updated periodically through indexation or value-adjustment clauses, to prevent creeping underinsurance. For high-value risks, brokers recommend an independent valuation to avoid the average clause being applied at claims stage.

Jurisdictional comparison

All three jurisdictions share the same underlying rule but differ in its statutory basis: Switzerland regulates it in Art. 51a VVG (expressly codified since 2022), Germany in Section 75 VVG, and Austria in Sections 56 et seq. VersVG, each with its own detailed rules on valuation in disputed cases.