Underinsured? The average clause, and what to do when your payout is cut
The average clause lets an insurer reduce a payout in proportion to how underinsured you are: insure for half the rebuild cost and you may be offered half the claim. On a home policy it is worth checking whether it applies fairly at all, because the Ombudsman often says it does not.
Key takeaways
- The formula is sum insured divided by rebuild value, multiplied by your claim. It applies to claims of any size, not only total losses.
- Check the policy contains an average clause. The Ombudsman sees cases where insurers applied one that was not there.
- The Ombudsman usually says applying average is not fair if the insurer never asked you for the full rebuild or replacement cost.
- Where the questions you were asked were unclear, the Ombudsman usually says the claim should be paid in full, not reduced.
- If the insurer treats it as a misrepresentation instead, the statutory reduction is calculated on premium, which is a different and often smaller reduction.
What the average clause is, and the formula insurers use
The average clause, sometimes called the condition of average, is a policy term that lets an insurer cut a settlement in proportion to how far your sum insured falls short of the real cost of rebuilding or replacing.
The formula is the same everywhere:
(sum insured ÷ actual rebuild or replacement value) × claim = payout
The part that surprises people is that it applies to every claim, not only to a total loss. Being 50% underinsured does not mean you are covered in full up to half the value. It means half of any claim, including a small one.
A worked example on a water damage claim
A pipe fails under a kitchen floor. Strip out, drying, new units and reinstatement come to £20,000. The rebuild cost of the house is £400,000, but the policy was set up years ago with a sum insured of £200,000.
The insurer treats the property as 50% underinsured, so the £20,000 claim is settled at £10,000. Your excess then comes off that. The shortfall on a single mid-sized escape of water claim is £10,000 and more, which is why this clause matters most on exactly the sort of claim this site is about.
Rebuild cost is not market value
The most common cause of underinsurance is insuring for what the house is worth rather than what it would cost to rebuild. They are different figures, and in some areas they are very different.
Rebuild cost means clearing the site, professional fees, VAT, and building the property again from nothing. It excludes the land, which is often the larger part of market value. A flat worth £350,000 might have a rebuild cost of £180,000, and a rural house worth £300,000 might cost £400,000 to rebuild.
Why your sum insured drifted without you doing anything wrong
Almost nobody sets out to underinsure. Two things do it quietly.
Build cost inflation
A figure that was accurate when the policy was set up erodes every year that building costs rise. Renewals roll forward with an index-linked uplift that may not track real costs, and after several years the gap can be substantial. Nothing on your renewal notice announces it.
Bedroom-rated and pre-filled sums insured
Buy through a comparison site and you may never be asked for a rebuild cost at all. Some policies are rated on the number of bedrooms. Others pre-fill a figure based on your postcode and property type, and the field is easy to accept without reading.
This matters more than it looks, because it goes directly to whether the insurer can fairly reduce your claim later. Which brings us to the part most articles on this subject leave out.
Been told you are underinsured?
Send us the reduction letter and the policy schedule. We will tell you whether the reduction looks like it stands up. Get a free claim review.
On a home policy, average may not be the right test
Most writing about the average clause is aimed at businesses, where average is standard and the policyholder is expected to value their own assets. Home insurance is different, and the difference is worth money to you.
What the Ombudsman says about unclear questions
The Financial Ombudsman Service publishes its approach to underinsurance in home insurance complaints. It starts from the position that consumers are not valuers: "Consumers aren't usually experienced in calculating these things."
It then looks at what the insurer asked you, and whether the question was clear. It asks:
- Did the insurer give clear descriptions to help you value contents or estimate rebuild cost?
- Did it make clear you needed the full replacement cost?
- Did it explain what "contents" or "outbuildings" mean in the policy?
- If you applied online, was it easy to do without reading guidance notes?
If the answer to any of those is no, the Ombudsman says it will "probably say it's not fair" for the insurer to apply the average clause, void the policy, or adjust the claim in other ways.
It is specific about wording, too. Asked how to value contents, it treats "What's the total value of contents at your property?" as the clearest question, and warns that "How much cover do you need?" and "What sum insured do you need?" can both lead to underinsurance because people do not understand what is being asked. If your insurer asked one of the vaguer versions, that is a point in your favour.
Proportionate under the 2012 Act is calculated on premium
There is a second route insurers sometimes take: treating the low sum insured as a misrepresentation rather than applying a policy clause. If they do, the Consumer Insurance (Disclosure and Representations) Act 2012 governs what they may do about it.
Where a misrepresentation was careless rather than deliberate, and the insurer would still have insured you but at a higher premium, the Act says it "may reduce proportionately the amount to be paid on a claim". Crucially, the Act defines that reduction against premium: the insurer need pay only the percentage that the premium you were charged bears to the premium it would have charged.
That is a different sum from the average clause, which works on sum insured against rebuild value. A 50% shortfall in cover rarely means the premium would have been double, so the premium-based calculation is often the smaller reduction of the two. If a reduction has been applied to your claim, it is fair to ask which basis it was calculated on and to see the working.
When the Ombudsman says pay in full
The strongest part of the Ombudsman's published approach is what it expects insurers to do when they get this wrong. It says it will usually say the insurer has to pay the claim in full if any of these are true:
- the insurer did not ask for the full cost of replacing all your contents
- the insurer did not ask for the full rebuild cost
- the insurer's questions were unclear
- you were not warned about the consequences of underinsurance
Not reduced differently. Paid in full. It may also award compensation for distress and inconvenience on top.
Two of the Ombudsman's own published case studies are water damage claims cut this way: one where a couple's contents settlement was reduced after a burst pipe caused £50,000 of damage, and one where a buildings claim after water damage was cut by 50% when a loss adjuster found a problem with the rebuild cost estimate.
This is general information about how the rules work rather than advice on your policy, and every case turns on its own facts. But the direction of travel is clear enough to be worth acting on.
What to do if your water damage settlement has been reduced
- Get the basis in writing. Ask whether they are applying an average clause or treating it as a misrepresentation, which policy term or statutory provision they rely on, and how the percentage was calculated. These are different mechanisms with different sums.
- Find the clause. Read the policy wording and confirm an average clause is in it at all. The Ombudsman sees complaints where insurers applied one that did not exist.
- Go back to what you were asked. Retrieve the application or renewal screens if you can. What the insurer asked, and how clearly, is the centre of the case. A pre-filled or bedroom-rated figure you were never told to check is a strong point.
- Complain formally, then escalate. The insurer has eight weeks to give a final response. After that you can refer it free to the Financial Ombudsman Service, usually within six months of that response. Our guide on disputing a water damage claim covers the sequence.
An underinsurance reduction is a settlement problem as much as a refusal, so it is worth checking the rest of the offer at the same time. Our page on underpaid water damage claims lists what a full escape of water settlement should contain, and trace and access is the other line most often missing.
How to check whether you are underinsured now
If you are reading this before a claim rather than during one, the fix is cheap compared with the shortfall.
- Find the sum insured on your schedule for buildings and for contents separately.
- Compare the buildings figure against a rebuild cost, not against what the house would sell for. The RICS Building Cost Information Service calculator is the standard free tool.
- Value contents by walking room to room rather than estimating a round number. People underestimate contents more often than buildings.
- Tell your insurer the corrected figure at renewal, and keep a record that you did.
On a larger claim the gap between a reduced offer and a full one runs well into five figures. Our page on high-value water damage claims covers where independent help pays for itself, and whether you need a loss assessor is honest about when you do not.
This page is general information, not insurance, legal, or financial advice. We are not an insurer, adjuster, or regulated by the FCA. Every policy is different, so always check your own wording, and see our FAQs for more common questions.