Average clause for underinsurance
Reduction of the indemnity in the ratio of the sum insured to the true value of the property, applying even to a partial loss.
Article L. 121-5 of the French Insurance Code. A building worth 1,000,000 euros is insured for 600,000; a partial loss comes to 200,000. The indemnity falls to 120,000, or 60% of the damage, although the sum insured would have covered the loss three times over. A policyholder who under-insures is treated as its own insurer for the difference, and the rule bites even when the loss is far below the sum insured, which always surprises people. The reason is rating: premium is computed on the declared sum, and without the rule it would always pay to under-declare while staying covered on partial losses, which make up most of the frequency. Insureds often set it aside with a waiver of average clause, or neutralize it through index linking of the sums insured.
Article L. 121-5 of the French Insurance Code states the rule. A building worth 1,000,000 euros is insured for 600,000 and suffers a partial loss assessed at 200,000 euros: the indemnity drops to 120,000 euros, 60% of the damage, although the sum insured covered the loss three times over. It is the least understood sanction in insurance contract law.
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