subject: Commercial building insurance - the average clause [print this page] If you have a commercial building insurance, your policy will contain a clause known as "the average clause". Whilst there are many clauses, conditions and warranties within every policy, some are more important than others. The average clause, as many have found out, is one of the more important ones.
The chances are, that even if you have read your policy wording, or reviewed it, this clause is not one that you have heard of. So what exactly does it mean?
The average, or reinstatement clause, simply states that you need to insure for the correct amount. Unlike houses and cars, insurers do not have unlimited statistics that say how much it will cost to replace a commercial building. If you think about your family car. If it is a 2004 Ford Galaxy, with 50,000 miles, then it will not take long to find out how much it would cost to buy an equivalent model.
So, whilst you are asked to declare the value of the car at quote stage, this does not really affect things. But, when you are talking about business insurance, things are different. We do not have scales, or levels of cover. You need to state exactly how much a building would cost to re-instate fully.
If you have a modern, steel framed, building with dwarf brick surrounding walls, you will be able to work out, very roughly what it would cost to rebuild. You take a cost per square yard, say 75, and multiply this by the total area. As it is modern materials, then the rebuilding cost is not going to change greatly. If you are talking about a Grade I listed hotel, in the middle of nowhere, with difficult access roads, then the rebuilding cost can, without question, be anywhere from a few hundred to a few thousand pounds per square yard.
If you have a commercial building, such as the hotel, insured for 1,000,000, many people think that if it were burned to the ground and destroyed completely, then the insurers would simply pay out 1,000,000. However, this is not the case and this is where average kicks in. If the building would really cost 2,000,000 to rebuild, then you are effectively under-insuring the structure.
The insurers are receiving 50% less premium than they should have, so any claims will be reduced by 50%. If the building were completely destroyed, then you will not get the 1,000,000, but 500,000. Some people feel this in unfair, but you have to think about from the insurers point of view. They have not been paid the full premium for the risk, so it is quite right that they can turn around and reduce claims.
Insurers do have a heart though. They understand that there will always be cases where this is the potential for a sum insured to be slightly out. Most commercial building insurance policies, will allow leeway of between 10 and 20%. So, if your 1,000,000 policy is really for a building that costs 1,150,000 to rebuild, most insurers will pay the full amount and not reduce this by 15%.
As with all policies, you need to speak to an expert, independent business insurance broker, to get advice on not only the cost, but the inner terms and conditions, before you purchase any policy.
Commercial building insurance - the average clause
By: Jack Brown
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