Underinsurance tolerance clause

The average rule penalizes underinsurance: if the declared value is lower than the actual value on the day of the loss, the indemnity is reduced in the same proportion, even for a partial loss. Applied strictly, it hits good-faith insureds whose values have simply aged, through construction cost inflation or modest undeclared acquisitions. The tolerance clause softens this mechanism: as long as the shortfall does not exceed a threshold set in the contract, for example ten or twenty percent, the average rule does not apply and the loss is paid in full, within the declared values. Beyond the threshold, depending on the wording, the reduction applies either to the whole gap or only to the part exceeding the tolerance. The clause is often combined with automatic indexation of values, following a construction cost index, to limit erosion of declared values. For the underwriter, tolerance is a measured concession: it avoids disputes over small gaps, but too wide a tolerance empties the average rule of its role as an incentive to declare accurate values.