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Could average clauses sink your arts organisation in a claim?

Published: 01/08/2017

So the worst has happened and your arts organisation needs to make an insurance claim. The incident’s covered under your policy, but your insurers are saying they’re not going to pay out the full amount of your loss – even after the policy excess has been deducted. How can this be?

HOW THE APPLICATION OF THE ‘AVERAGE’ CLAUSE COULD HIT YOUR ARTS ORGANISATION HARD

The answer lies in your policy conditions – in particular the ‘Average’ clause. If this clause is applied by insurers in the event of a claim, it means that where the sum insured is inadequate (i.e you’re under-insured), the insurer can reduce its liability for a claim by applying a proportionate approach. The sum to be paid out is usually calculated as follows:

Sum insured
(True value at risk) x (loss) =  claim sum to be paid

So for example:

Your property is worth £100,000.
You insure it for £80,000. 
You suffer a loss of £5,000.
If your policy is ‘subject to average’, the maximum amount you recover will be £4,000.

So how can you prevent this happening to you?

  • Review your sums insured on a regular basis – always at renewal and certainly when you’ve made significant purchases or alterations to your business
  • Most property policies are now on a ‘reinstatement as new’ basis of cover, so make sure the sum insured reflects this, and not your discounted book value
  • Don’t forget that it’s not just property polices that are ‘subject to average’ – this clause also applies to business interruption, goods in transit and cancellation policies

Finally, why do insurers make their policies subject to this clause? The answer is simple: they need to make sure they receive the right level of premium for the risk they’re being asked to undertake.

Don’t be an Average Joe – let us help you do a great job and make good insurance decisions for your arts organisation!

For more information email Tracey McCreath.

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You can call us to talk more about your business on +44 (0)1223 200650 or +44 (0)20 3865 0149

Photo of Tracey McCreath ACII

Tracey McCreath ACII

DIRECTOR, MEDIA, ARTS & ENTERTAINMENT

Direct Dial: +44 (0) 1223 200655

Email: tracey.mccreath@laplayainsurance.com

Twitter: @TraceyatLaPlaya