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In the area of insurance, understanding the nuances of policy terms and clauses is essential to ensure the expected coverage. One such crucial clause in fire insurance policies is the Average Clause in Fire Insurance. In this comprehensive guide, we will delve into the concept of the Average Clause, explore the formula used to calculate claim amounts, and provide a case study to illustrate its application in an Indian scenario.

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What is the Average Clause in Fire Insurance?

The Average Clause in Fire Insurance, also referred to as the "Underinsurance Clause," holds significant weight in fire insurance policies. It plays a pivotal role in determining the compensation you receive in case of a partial loss due to fire. The primary goal of the Average Clause is to discourage policyholders from underestimating their property's value and paying lower premiums. It encourages policyholders to ensure adequate insurance coverage, ensuring equitable compensation in case of a loss.

The Average Clause comes into play when the insured property is undervalued during policy purchase. In such instances, if a partial loss occurs due to fire, the insurance company does not cover the entire loss amount. Instead, the compensation is calculated based on the ratio of the sum insured to the actual property value. This mechanism ensures that the policyholder shares a proportionate part of the loss, reflecting the extent of underinsurance.

Also Read: 12 Perils of Fire Insurance Policy

Average Clause Formula - Calculation of Claim Amount in Fire Insurance

The formula employed to calculate the claim amount under the Average Clause in Fire Insurance is as follows:

Claim Amount = (Sum Insured / Actual Value of Property) × Loss Amount

Breaking down the formula:

Sum Insured: This denotes the insured amount specified in the fire insurance policy.

Actual Value of Property: This represents the property's true market value at the time of the loss.

Loss Amount: This refers to the value of the loss resulting from the fire incident.

Applying the formula allows the insurance company to ascertain the compensation amount in line with the underinsurance level. The greater the underinsurance, the higher the percentage of the loss that the policyholder bears.

Read More: 5 Easy Steps to Claim Fire Insurance


Case Study - Claim Settlement in Fire Insurance

Let's consider a scenario where a residential property is insured for ₹1,000,000 under a fire insurance policy, while its actual market value is estimated at ₹1,500,000. A fire incident occurs, resulting in damage amounting to ₹500,000. Calculating the claim settlement using the Average Clause formula:

Claim Amount = (₹1,000,000 / ₹1,500,000) × ₹500,000 ≈ ₹333,333.33

In this context, due to underinsurance, the policyholder would receive a claim settlement of approximately ₹333,333.33, proportional to the degree of underinsurance.

Read about Reinstatement Value Clause In Fire Insurance.


The Average Clause in Fire Insurance stands as a pivotal element ensuring fairness in claim settlements, even in the Indian insurance landscape. It serves as a reminder for policyholders to accurately assess their properties and secure appropriate coverage, averting inadequate protection and potential financial setbacks in times of loss. Grasping the formula to compute claim amounts under the Average Clause empowers policyholders to comprehend the potential impact of underinsurance on their compensation.

When obtaining fire insurance in India, it's prudent to diligently evaluate property value and secure coverage that genuinely reflects its market worth. By doing so, you not only adhere to the tenets of the Average Clause but also relish the assurance that arises from knowing you are well-guarded against fire-related risks, aligned with the specific conditions of the Indian insurance market. Keep in mind that insurance isn't just a safety net; it's a mechanism to shield your assets and financial stability during periods of uncertainty.


Frequently Asked Questions

1. Does the Average Clause apply only to fire insurance policies, or is it relevant to other types of insurance as well?

The Average Clause, while commonly associated with fire insurance, can also be relevant to other forms of property insurance. It's especially prevalent in policies where the insured value significantly impacts the claim settlement. The clause's purpose remains consistent: to prevent underinsurance and ensure fair compensation for partial losses. Therefore, while it's prominently seen in fire insurance, similar principles may apply in other property insurance contexts.

2. Can you avoid the impact of the Average Clause by insuring your property for a higher sum?

While insuring your property for a higher sum might provide a greater claim amount in case of a partial loss, it's essential to do so accurately and transparently. Deliberate overvaluation of the property's worth to manipulate the claim amount could lead to policy violations and potential claim denials. The key is to genuinely assess the property's value and ensure that it's adequately covered, eliminating the need to resort to underhanded tactics.

3. Are there any circumstances where the Average Clause might not apply, even if the property is underinsured?

In some cases, specific insurance policies might include endorsements or clauses that modify the application of the Average Clause. For instance, certain high-value items or specialized coverage might not strictly adhere to the Average Clause principles. However, it's crucial to carefully read and understand your policy documentation and consult with your insurance provider to know the precise conditions under which the Average Clause might be altered or excluded.

4. How can policyholders accurately assess the actual value of their property to avoid underinsurance and the negative impact of the Average Clause?

A. Policyholders should consult with valuation experts or use government assessment tools to determine their property's accurate market value. Regularly updating this valuation ensures coverage matches current market conditions. It's crucial to incorporate changes like renovations or market fluctuations into the property's insured value. This approach helps in avoiding underinsurance and mitigates the impact of the Average Clause.

5. What steps should policyholders take immediately following a fire incident to ensure their claim is processed efficiently, considering the implications of the Average Clause?

A. After a fire incident, policyholders should promptly notify their insurance provider, document the damage through photographs, and compile a detailed inventory of losses. Submitting a comprehensive claim form along with supporting documents expedites the claim process. Engaging with a professional assessor might also be beneficial. These steps, combined with an understanding of the Average Clause, help in ensuring a fair and swift claim settlement.

6. How frequently should policyholders review and adjust their property's insured value to reflect changes in the market value and avoid being affected by the Average Clause?

A. Policyholders should review their property's insured value annually or after significant events like renovations or major purchases. Keeping track of market trends and property values in their area also aids in maintaining an appropriate level of coverage. Adjustments should be communicated to the insurer to ensure the policy reflects the current value of the property, thus avoiding complications related to the Average Clause.