Underinsurance & average clause calculator
Enter three figures. The tool shows the standard pro-rata average arithmetic instantly — nothing is stored or sent anywhere.
- Underinsurance—
- Formula applied—
- Shortfall you would fund—
This tool illustrates how a standard pro-rata average clause works. It is not advice, a quote, or a statement of how any particular policy would respond — wordings differ, and some policies waive average below a threshold or use day-one uplift. Talk to a broker about your own figures.
Worked examples: what pro-rata average does to real claims
The rule every broker states the same way: payout = loss × (sum insured ÷ true value), capped at the sum insured. Here is that arithmetic on five round-number scenarios:
| True rebuild value | Sum insured | Underinsured by | Loss | Average clause pays | You fund |
|---|---|---|---|---|---|
| £1,000,000 | £600,000 | 40% | £100,000 | £60,000 | £40,000 |
| £500,000 | £400,000 | 20% | £50,000 | £40,000 | £10,000 |
| £2,000,000 | £1,000,000 | 50% | £400,000 | £200,000 | £200,000 |
| £750,000 | £600,000 | 20% | £750,000 (total loss) | £600,000 | £150,000 |
| £1,000,000 | £1,000,000 | 0% | £100,000 | £100,000 | £0 |
Figures show the standard pro-rata average formula only, before any policy excess. Individual wordings vary; some waive average where underinsurance is modest. Page reviewed 21 August 2026.
What an average clause is
Most UK commercial property and contents policies contain a condition of average (sometimes called the pro-rata condition of average, or “subject to average”). It exists because premiums are calculated on the sum insured: if you declare £600,000 for a building that would actually cost £1,000,000 to rebuild, you have paid a premium for 60% of the risk. The average clause makes the payout match: every claim — partial losses included — is scaled down by the same 60%. The common misunderstanding is that underinsurance only bites on a total loss. It does not. A £100,000 kitchen fire in that building pays £60,000, and the remaining £40,000 comes out of the business.
Why sums insured drift below true value
Almost nobody sets out to underinsure. The usual routes there are gradual: a rebuild figure copied forward at renewal for years while construction costs rose sharply; a sum insured based on market value or the purchase price rather than reinstatement cost, which includes demolition, debris removal, professional fees and VAT where applicable; extensions and fit-outs never added to the declared figure; and plant or stock valued at book value rather than today’s replacement cost. Construction cost inflation in recent years has pulled many previously adequate figures well below reality — which is why insurers and the RICS have repeatedly flagged widespread commercial underinsurance.
Day-one uplift and other ways policies soften the problem
Some policies are written on a day-one reinstatement basis: you declare the rebuild cost at the start of the policy (the day-one figure) and the insurer automatically uplifts it — commonly by a stated percentage — to absorb inflation during the policy year and the rebuild period. That protects you against inflation after the declaration, but not against a declaration that was wrong on day one; average can still apply to the declared figure. Some wordings also waive average entirely where the shortfall is small. Both features depend on the exact wording, which is precisely the kind of thing a broker checks before renewal rather than after a fire.
How to fix it at renewal
The clean fix is a current reinstatement cost assessment for buildings — a desktop or on-site valuation of the full rebuild cost including fees, demolition and debris removal — and a fresh replacement-cost review of plant, machinery and stock. Then keep the figure alive: index it or reassess it periodically, and tell your broker when you extend, refit or buy kit mid-term. If your last proper valuation was more than a few years ago, treat this calculator’s output as a reason to book one.
Frequently asked questions
Does the average clause apply to partial losses?
Yes — that is the point of it. The pro-rata condition of average scales every claim by the ratio of sum insured to true value, so a partial loss on an underinsured policy is reduced in exactly the same proportion as a total loss would be.
What if my sum insured is higher than the true value?
No average is applied and claims are paid in full up to the sum insured. Over-insurance does not earn you a larger payout, though — indemnity is capped at the actual loss — so you are simply paying premium on value that is not there. A correct figure is better in both directions.
Is market value the right sum insured for a building?
Usually not. Buildings should generally be insured for reinstatement cost: the full cost of demolition, debris removal, rebuilding to current regulations and professional fees. Market value can be higher or lower than rebuild cost and neither direction protects you from average.
Do all commercial policies include an average clause?
Most UK commercial property wordings do, in some form. Some waive it where underinsurance is below a stated threshold, and day-one uplift bases change what figure it is tested against. The only way to know how yours behaves is to read the wording — or have your broker do it.
Does average apply to business interruption cover too?
It can. Sum-insured BI policies commonly apply average to an inadequate gross profit figure, while declaration-linked BI substantially reduces that risk if the declaration is honest and kept current. See our business interruption guide for how the BI sums work.
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This page is general information, not advice on a specific policy.