EXPLORING THE CONDITION OF AVERAGE CLAUSE IN INSURANCE POLICIES
Exploring the Condition of Average Clause in Insurance Policies (In India)
The Average Clause is a significant provision found in many insurance policies, particularly in property insurance. This clause plays a critical role in determining the payout amount in case of a claim. Understanding how the Average Clause works is essential for policyholders and insurance professionals alike. In the Indian context, its application has specific nuances that can significantly impact the settlement of insurance claims.
1. Understanding the Average Clause
The Average Clause is a stipulation in an insurance policy that reduces the amount of a claim if the insured property is found to be underinsured. The basic principle behind this clause is that the insurer expects the policyholder to insure the property for its full value. If the property is underinsured, the insurer will only pay a proportionate amount of the loss.
For example, if a property worth ₹10,00,000 is insured for only ₹5,00,000 (i.e., 50% of its value), and a loss of ₹2,00,000 occurs, the insurer would only pay 50% of the loss, i.e., ₹1,00,000, because the property was underinsured.
2. Application of the Average Clause in India
In India, the Average Clause is particularly relevant in fire and property insurance policies. The clause is invoked when the insured sum is less than the actual value of the property at the time of loss. Indian insurers apply this clause rigorously to ensure that policyholders do not take undue advantage by underinsuring their properties to reduce premium costs.
Key Points:
- Proportional Liability: The liability of the insurer is directly proportional to the amount of insurance taken in relation to the actual value of the property.
- Impact on Claims: If the insured amount is less than the property’s value, the compensation will be reduced proportionately.
- Encourages Full Insurance: The Average Clause encourages policyholders to insure their properties for their full value to avoid losses during claims.
3. Legal Implications in India
The Average Clause has been upheld by Indian courts in various judgments, reinforcing its validity and applicability in insurance contracts. Courts have consistently ruled that if a property is underinsured, the policyholder must bear a proportionate share of the loss.
Key Case Law:
- New India Assurance Co. Ltd. v. Grandhi Hanumantharayudu & Ors.: In this case, the court upheld the application of the Average Clause, reiterating that the insured must bear a proportion of the loss if they have underinsured the property.
4. Challenges and Controversies
The Average Clause, while ensuring fairness, has been the subject of criticism and controversy in India. Policyholders often argue that they are not fully aware of the implications of underinsurance and the Average Clause at the time of purchasing the policy. This has led to disputes and dissatisfaction when claims are settled for amounts lower than expected.
Common Issues:
- Lack of Awareness: Many policyholders are unaware of the Average Clause and its implications.
- Disputes: Disagreements often arise when the insured realizes that the claim amount is reduced due to underinsurance.
- Need for Transparency: There is a growing demand for insurers to clearly explain the Average Clause and its consequences to policyholders at the time of policy issuance.
5. Mitigating the Risks of the Average Clause
To avoid the pitfalls of the Average Clause, policyholders in India should take the following steps:
Key Strategies:
- Proper Valuation: Ensure that the property is valued accurately and insured for its full value.
- Review of Insurance Policy: Regularly review the insurance policy to adjust the sum insured as the value of the property increases.
- Professional Advice: Seek advice from insurance professionals or valuers to determine the correct insurance amount.
The Average Clause is a critical aspect of insurance policies in India, designed to prevent underinsurance and ensure fairness in claim settlements. However, it also places a significant responsibility on policyholders to ensure their properties are adequately insured. By understanding the implications of the Average Clause and taking proactive steps, policyholders can safeguard their interests and avoid unpleasant surprises during claim settlements.
