Underinsurance and the average clause: does under-buying limits cut your claim?

Reviewed by Matthew Bartlett, Director, Apex Insurance Brokers Limited · Last reviewed 2026-08-05

What the average clause actually does

Underinsurance means your declared sum insured is less than the true value of what you are insuring. The "condition of average" — often just called the average clause — is the mechanism insurers use to correct for it at claim stage. It is standard wording in commercial property, contents, stock and business interruption policies across the UK market.

The important point that surprises many business owners: average bites on partial losses, not just total losses. You do not have to lose everything to feel it. If a fire damages one section of your premises, the insurer first checks whether the whole property was adequately insured. If it was not, they scale down what would otherwise be a fully covered partial claim.

The standard calculation is straightforward:

Claim payment = (Sum insured ÷ True value) × Loss

A worked example

Suppose a workshop would genuinely cost £1,000,000 to rebuild (the correct "reinstatement" figure), but it is insured for £600,000. A fire causes £200,000 of damage — well within the sum insured, so you might expect the loss paid in full.

Because the property is only 60% insured, the average clause applies the same 60% to the claim:

• Sum insured ÷ true value = £600,000 ÷ £1,000,000 = 60%
• Payout = 60% × £200,000 = £120,000
• You absorb the remaining £80,000 yourself

The £80,000 gap is the cost of underinsurance — and it lands exactly when you can least afford it.

Where you'll meet average — and where you won't

This is why the distinction matters. On property and business interruption, you declare a value and average polices it. On liability policies (including professional indemnity) there is no average clause in the same sense — you buy a limit of indemnity, and the risk is simply that a claim exceeds the limit and you fund the excess. Under-buying still hurts on liability; it just does so by capping, not by proportional reduction.

Why underinsurance is so common

Underinsurance is rarely deliberate. It creeps in because values drift and declarations don't keep up. The usual causes:

• Rebuild cost is not market value. Reinstatement includes demolition, debris removal, professional fees, and current building regulations — often well above what the property would sell for.
• Construction inflation. Material and labour costs have risen sharply in recent years, so a sum insured set a few years ago can be badly out of date.
• Business interruption periods set too short. Many firms pick a 12-month indemnity period when a serious loss realistically takes 18–36 months to recover from.
• Growth that isn't declared. New stock, extra plant, refurbishments and higher turnover all raise the value at risk.

The Royal Institution of Chartered Surveyors (RICS) provides reinstatement cost assessments precisely because desktop guesses are so often wrong. Industry commentary from bodies such as the Association of British Insurers (ABI) has repeatedly flagged that a large share of UK commercial properties are underinsured.

How to protect yourself from average

• Get a professional reinstatement assessment for buildings, and review it periodically — not just at renewal by rolling last year's figure forward.
• Value contents, plant and stock at replacement cost, including seasonal peaks for stock.
• Set the business interruption indemnity period realistically — think about how long full recovery would genuinely take, and use the correct gross profit definition.
• Ask about a "Day One" uplift or an index-linking clause, which build in a margin for inflation between renewals.
• Watch for a Declaration Linked basis on business interruption, which can remove the application of average where the policy allows it.

Some policies also carry a "condition of average" that only applies below a stated tolerance — for example, average may not bite if you are insured to at least 85% of value. Terms vary between insurers, so the exact wording of your schedule matters. If you'd like a broker to sense-check your declared values, start a review with Apex.

The Insurance Act 2015 angle

Underinsurance is separate from, but related to, your duty of fair presentation under the Insurance Act 2015. Getting a sum insured wrong is a valuation issue that triggers average. Failing to disclose material facts about the risk is a disclosure issue that can trigger the Act's remedies. Both can shrink a payout, and both are avoidable with an accurate, up-to-date presentation of your business.

Common questions

Does the average clause apply if I have a total loss?

On a total loss you are usually already capped at your sum insured, so average has less to add — you simply cannot recover more than you insured. Average's real sting is on partial losses, where an underinsured business is surprised to find a within-limit claim scaled down.

Is there an average clause on professional indemnity?

Not in the property sense. PI and other liability policies work off a limit of indemnity rather than a declared value, so there's no proportional reduction. The equivalent risk is buying too low a limit and having to fund any claim that exceeds it yourself.

How often should I review my sums insured?

At least annually at renewal, and sooner after any material change — a refurbishment, new equipment, a jump in turnover or stock, or a period of high construction inflation. A formal reinstatement assessment every few years is sensible for property.

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This guide is general information, not advice on a specific policy or a substitute for your policy wording.