Home Insurance - 'average clause'?!?

on_my_oe

I read an article today in the Independent which mentions;

The National Consumer Agency said that most insurers apply a rule that means they will only pay out for the amount listed in the insurance policy.

This means that if a homeowner only insures the contents for €40,000, that is all they will get if the contents are damaged, stolen or destroyed.

A survey of eight insurers found this was because most of them were applying the so-called "average clause".

This is a condition set by an insurer that a payment for damage or loss will be in proportion to the value insured. So, if a building worth €100,000 but insured for €50,000 is totally destroyed, the insurers will only pay €25,000.

I can understand if someone screws up and insures for €50,000 when it's worth €100,000 and so only gets €50,000, but I don't understand how they'd get just €25,000.

http://www.independent.ie/business/personal-finance/property-mortgages/consumers-may-lose-out-if-homes-are-underinsured-30448546.html

Henry Ford III

Terribly written article.

€40k s.a. on contents would be paid out in the event of total loss. Where's the issue there?

Averaging isn't new, and can be nasty however. It puts the onus on the policyholder to ensure the sum assured is in line with value, and not be scrimping on the premium.

ted1

If its worth 200 and insured for 100, then only 50% of if is insured so when making a claim they apply this weighting

SBarrett

It's to stop people trying to pull a fast one on the insurance company. The problem is that the vast majority of people don't know about it. It's in the reams and reams of paperwork that has to be issued to you when you take out a policy.

The_Pretender

If you only insure the house for half of what it's worth, then only half of the damages will be paid out, it makes sense.

petecork

The_Pretender wrote: »

If you only insure the house for half of what it's worth, then only half of the damages will be paid out, it makes sense.

but if they paid out 50 that would be half the valuation? Just asking the question as I didn't know this is how they calculated it

If the article is correct, does that mean if someone insures a house for 80,000 (correct valuation at the time)
its destroyed by fire 1 month later and insurers say its now worth 100,000, now the insurer will now just payout 64,000 - seems very unfair that a rise in property values can allow the insurer to payout less


Article: (50/100) * 50 = 25
my example: (80/100) * 80 = 64

Henry Ford III

petecork wrote: »

but if they paid out 50 that would be half the valuation? Just asking the question as I didn't know this is how they calculated it

If the article is correct, does that mean if someone insures a house for 80,000 (correct valuation at the time)
its destroyed by fire 1 month later and insurers say its now worth 100,000, now the insurer will now just payout 64,000 - seems very unfair that a rise in property values can allow the insurer to payout less


Article: (50/100) * 50 = 25
my example: (80/100) * 80 = 64

Yes. It'll be a valuer who sets the figures however.

It's tough because if you overvalue you won't get the full sum assured either, only the market value.

oldyouth

You are deemed to be your own insurer for the undervalued amount.

In a total loss situation, if the value is €100,000 and you insure it for €50,000, you are effectively half insured. In this example you will get €50,000 (half the value at risk) and you are deemed to self insure for the balance.

It is when there is a partial loss that Average can get complicated. In the above example, if your house need repairs of €6,000, you would only get €3,000 and be deemed to self insure for the balance. This is a simplified example of 50% under insurance, but the method is the same for any proportion

kkelliher

on_my_oe wrote: »

This is a condition set by an insurer that a payment for damage or loss will be in proportion to the value insured. So, if a building worth €100,000 but insured for €50,000 is totally destroyed, the insurers will only pay €25,000.[/I]

saw this myself, clearly an error as the answer would be 50k in the example given.

The average equation is straight forward:


Actual repair value / Value at time of incident x Value of insurance taken out

100,000 / 100,000 x 50000

ted1

petecork wrote: »

but if they paid out 50 that would be half the valuation? Just asking the question as I didn't know this is how they calculated it

If the article is correct, does that mean if someone insures a house for 80,000 (correct valuation at the time)
its destroyed by fire 1 month later and insurers say its now worth 100,000, now the insurer will now just payout 64,000 - seems very unfair that a rise in property values can allow the insurer to payout less


Article: (50/100) * 50 = 25
my example: (80/100) * 80 = 64

It's the rebuild cost you insure not the market price

coylemj

Henry Ford III wrote: »

Yes. It'll be a valuer who sets the figures however.

It's tough because if you overvalue you won't get the full sum assured either, only the market value.

Both of those statements are incorrect.

A valuer writes a report for a bank setting out what he/she thinks the house is worth if it was put on the market, this has virtually no bearing on the rebuild value of the house.

An insurance company won't necessarily pay you the 'market value' in the event of total loss because the market value of the house includes the site value which has no effect on how much it will cost to rebuild the house if it's destroyed by fire.

The cover you require on the building is the amount of money you will need in the event of the worst possible scenario which is where the building is destroyed by fire so it needs to be demolished, the site cleared and a new house built to the same specification as before. That is affected by the size of the house, where it's located (labour is cheaper outside the bigger cities) and the current cost of labour and materials. Nothing to do with the 'market value'.

Henry Ford III

Thanks for stating the obvious. Apologies for my error in terminology

oldyouth

coylemj wrote: »

Nothing to do with the 'market value'.

You are, of course, totally correct. Insurance people, amongst themselves, often refer to the value of a claim. This would even be used when putting an estimate on an injury. We should be clearer perhaps on occasions like this. I see I veered that way myself in this thread

on_my_oe

Thanks everyone for all the input

Next question, suggestions on rebuild cost calculations? I can estimate all my fixtures and fittings, but labour etc I just don't want to be in a situation where I can't afford to rebuild if the worst happens

coylemj

on_my_oe wrote: »

Next question, suggestions on rebuild cost calculations? I can estimate all my fixtures and fittings, but labour etc I just don't want to be in a situation where I can't afford to rebuild if the worst happens

There are two ways to do this, one is cheap and cheerful, the second scientific and expensive.....

1. Phone your insurance company before your next renewal, tell them the square footage of the house, whether it's a bungalow or two-storey, detached or semi and ask them for guidance as to rebuild cost.

2. Pay a surveyor (note: not a valuer) to do an estimate as to cost of demolition, site clearance and rebuild.

A New earth

kkelliher wrote: »

saw this myself, clearly an error as the answer would be 50k in the example given.

The average equation is straight forward:


Actual repair value / Value at time of incident x Value of insurance taken out

100,000 / 100,000 x 50000

That's correct, if it's a total loss the average clause does not apply i.e.

If the property insured under the policy is underinsured at the time of loss, the following rules apply:
“(a) If you suffer a total loss, the provision will have no effect:“(b) If you suffer a partial loss, the maximum amount that you may recover will bear the same proportion to your actual loss as the amount for which the property is insured bears to the full value of the property:“(c) Whatever your loss, in no case will you be entitled to recover more than the amount for which the property is insured.

oldyouth

A New earth wrote: »

That's correct, if it's a total loss the average clause does not apply i.e.

If the property insured under the policy is underinsured at the time of loss, the following rules apply:
“(a) If you suffer a total loss, the provision will have no effect:“(b) If you suffer a partial loss, the maximum amount that you may recover will bear the same proportion to your actual loss as the amount for which the property is insured bears to the full value of the property:“(c) Whatever your loss, in no case will you be entitled to recover more than the amount for which the property is insured.

That line is a little misleading when you read it in conjunction with item (c)

If the full rebuild is €400,000 and you insure for €200,000 and suffer a total loss, average technically has no effect but the most you will get is your sum insured of €200,000. The reality is that you underinsured by 50% and you will get 50% of the value at risk €200,000. i.e. average is being implimented

A New earth

oldyouth wrote: »

That line is a little misleading when you read it in conjunction with item (c)

If the full rebuild is €400,000 and you insure for €200,000 and suffer a total loss, average technically has no effect but the most you will get is your sum insured of €200,000. The reality is that you underinsured by 50% and you will get 50% of the value at risk €200,000. i.e. average is being implimented

Only because you use a 50% example, if you had insured for €300,000 i.e. underinsured by 25%, as it's a full rebuild the average clause does not apply and you get 75% (not the 25% you were underinsured for)

oldyouth

A New earth wrote: »

Only because you use a 50% example, if you had insured for €300,000 i.e. underinsured by 25%, as it's a full rebuild the average clause does not apply and you get 75% (not the 25% you were underinsured for)

It is the exact same for every % of underinsurance. It is 'average', no matter what you call it. If you insure for €300,000 and the rebuild value is €400,000, your payment is 75% of the rebuild value. Just because you have gone to the limit of your sum insured doesn't mean that you are not deemed to self insure for the portion that you underinsured.

Your settlement is still

Sum Insured €300,000 X Loss Incurred €400,000
Rebuild value €400,000

A New earth

oldyouth wrote: »

It is the exact same for every % of underinsurance. It is 'average', no matter what you call it. If you insure for €300,000 and the rebuild value is €400,000, your payment is 75% of the rebuild value. Just because you have gone to the limit of your sum insured doesn't mean that you are not deemed to self insure for the portion that you underinsured.

Your settlement is still

Sum Insured €300,000 X Loss Incurred €400,000
Rebuild value €400,000

Correct, the Insurance Industry "Average Clause" does not apply

oldyouth

I give up :rolleyes: