One of the common complaints that the Insurance and Pensions Commission

has been receiving from policyholders since October 2018, is that of insurance

companies applying the condition of average on loss or damage to insured assets. The most dominant complaints have been with regards motor vehicle


What is a condition of average?

Insurance policies that have a condition of average clause allow insurance

companies to reduce their compensation obligations for the damage or loss suffered by the policyholder in proportion to the amount under insurance.

This results in the policyholder receiving less than the full value of the insurance


If an asset is insured for less than its actual value, in the event that the policyholder makes a claim under that policy, the condition of average may

be applied.

For example, if a car is insured for 50 percent of its actual value, the insurance company will only be obligated to pay 50 percent of the agreed cost of the damage or loss if the average condition is applied.

How does the condition of average principle work?

When policyholders insure their assets, it is their duty to advise insurance companies of the insurance value of those assets.

This declaration is what helps insurance companies determine how much policyholders pay as premiums. To this end, if policyholders undervalue their assets, the premium calculations will be based on the declared lower value. This means the policyholder will be paying lower than he/she should to cover the asset at risk.

For instance, if one insures his/her vehicle for a value of $10 000, when its actual value is $40 000, it would be unfair to expect the insurance company to pay $40 000 in the event of a total loss of the insured vehicle.

This would be unfair to both the insurance company and other policyholders under the same class of insurance.

It is equally important for the policyholder to avoid buying too much insurance

coverage that exceeds the actual value of the asset insured.

How policyholders can avoid these setbacks?

To avoid disappointments at claiming stage, it is important for policyholders to

always insure their assets for the correct value.

The correct value is the price at which a willing seller would be comfortable selling the asset to a willing buyer.

Therefore, if one were to sell his/her insured asset today, for instance, a vehicle for RTGS $20 000, it means that is the correct value of the vehicle. Therefore, one cannot then insure the same vehicle for RTGS $7 000 if they expect full compensation.

The recent Monetary Policy Statement removed the fixed exchange rate between the USD and the bond note or RTGS$, which could have an implication on insurance policies.

For example, if the actual value of someone’s vehicle is US$5000, one cannot

continue to pay premiums for the value of RTGS $5000 and expect full compensation.

If the official interbank rate is used, of say, US$1: RTGS $2.5, it means the official

value of that vehicle would be RTGS$12,500. In this case, if one pays premiums for the value of RTGS$5000, it means he/she would have under insured his/her vehicle, which leads to the insurance company applying the condition of average in the event of that insured vehicle being damaged or lost.