Condition of average

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Published on September 30, 2021 12:02:40 PM ● Video Link: https://www.youtube.com/watch?v=prUKZAZeKbs

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Condition of average (also called underinsurance in the U.S., or principle of average, subject to average, or pro rata condition of average in Commonwealth countries) is the insurance term used when calculating a payout against a claim where the policy undervalues the sum insured. In the event of partial loss, the amount paid against a claim will be in the same proportion as the value of the underinsurance.The formula used is





Payout

=

Claim

×


Sum Insured
Current Value




{\displaystyle {\text{Payout}}={\text{Claim}}\times {\frac {\text{Sum Insured}}{\text{Current Value}}}}
where Payout is the amount paid out by the policy, Claim is the amount claimed against the policy after a loss, Sum Insured is the maximum amount to be paid out by the policy, and Current Value is the value the policy should be insured for. Underinsurance occurs when Sum Insured is less than Current Value.
Sum Insured is the maximum amount that can be paid out and is only paid out in cases of total destruction. Where partial destruction occurs (a more common occurrence than total destruction), Payout is pro rata in line with the underinsurance. This is due to insurance companies basing the premiums on their risk of losing the full Sum Insured against total destruction events.

Source: https://en.wikipedia.org/wiki/Condition_of_average
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