Health Warning

"If you are significantly under insured, a fire will bankrupt you"

THE "AVERAGE CLAUSE" TRAP

Don't fall into the "Average Clause" Trap. For example, you may own a business which is worth around £300,000, complete as a Going Concern, but the cost of reinstating the buildings alone may be - for example - £600,000 - by no means uncommon, especially with stone, "black and white" or large but low trading buildings.

Imagine you suffer a fire which causes £180,000 worth of damage to the building, but only have insurance reinstatement cover of £300,000. You might think - "no problem, I have almost twice that amount of cover", but you forget the average clause.

The effect of the average clause is that the Insurance Company says "the true reinstatement value is £600,000, but you are only covered for £300,000 - half the real amount, therefore, we will only pay half of any valid claim you make". The Insurance Company therefore pays out £90,000 - leaving you £90,000 short.

Imagine also, that your turnover was around £220,000 pa, and your Bank Loan is £200,000. The Bank won't lend you the extra £90,000 to complete the rebuild and you have a fire damaged building which is worth about £60,000 as it stands.

The "worst case" scenario is that you have to sell the building as it stands, use the proceeds and the £90,000 insurance payment to pay off as much of your Bank Loan as possible, and you finish up with no home and no business. This simple example ignores the Contents and loss of Profits cover which a good policy will include, but the effect of under-insuring is the same in any event - possibly catastrophic.

By the way, the Insurance Companies won't pay "over the top" amounts if you over insure or insure the same risk with more than one company. They cap the amount payable to the true reinstatement cost and share the risk/cost where insurance is duplicated.

© Sidney Phillips 2000