Business Men

Commercial insurance policies contain a number of varying clauses which consumers need to be mindful of.

One clause that remains a constant is the inclusion in almost all commercial property and strata insurance policies – this being the ‘Co-Insurance’ or ‘Average’ clause.

This clause can have a significant impact on the policy holder in the event of a claim if not properly addressed at the inception of a policy.
As your Insurance broker, we take the responsibility to adequately advise and protect your interests against the effect this clause can have on a business if not properly addressed.

For your reference, a ‘Co-Insurance’ or ‘Average’ clause state that a property must be insured for its ‘full replacement value’. If a loss occurs and the insurer assessment shows that the property was not insured for its full replacement value, the insurer has the right to reduce the claim settlement by the equivalent percentage difference between your insured value and the actual replacement cost.
The potential for a portion of a loss to be deemed uninsured, forcing your business to meet the difference from its own working capital, is too great a risk not to properly address.

To see how this clause may be applied in a real claim example please refer to the calculation shown below;

Real claim example

A simple example illustrating the basic principle, application and effect of the Average / Co-Insurance clause is as follows:

Full Value of the Property Insured = $ 1,000,000
Policy Sum Insured / Declared Value = $ 500,000
Therefore you would be self insured for 50% of the full value.
Amount of Claim = $ 100,000
On the proviso the property were deemed a total loss

The maximum amount payable by the Insurer = $ 250,000

In this example, the insured party is left to bear the initial under-insured portion of $500,000 plus the penalty cost applied by the insurer under a ‘Co-Insurance’ clause of $250,000, total out of pocket expense is therefore $750,000

To ensure our clients are adequately insured and protected from uninsured loss such as this example, Challenge Insurance Services provide a free commercial property calculation service upon inception of a new policy and at every policy renewal.
While this building estimate should never be used in replacement of a property valuation, it does provide a quantified estimation of your building costs enabling you to comfortably declare a replacement sum insured that is in line with market replacement cost.

CIS have partnership programs with licensed real estate valuers who can provide specific market and replacement valuations on a discounted basis to CIS clients.
Refer here.