Underinsurance and the average clause: why a low sum insured shrinks your claim
If your property is insured for less than it is worth, most policies reduce every claim in proportion, not only the big ones. A worked example of how the average clause works.
By DPI Financial Services
General information, not advice. Figures checked September 2026.
In short: most South African property policies contain an average clause, also called the condition of average or pro rata clause. If you insure something for less than it would cost to replace, the insurer treats you as carrying the shortfall yourself and reduces your claim in the same proportion. It affects partial losses, not only total ones, which is why it surprises people.
How the average clause works
The calculation is simple:
Claim paid = loss × (sum insured ÷ actual replacement value)
The claim is then reduced by the excess in the usual way.
A worked example
These figures are illustrative only.
| Item | Amount |
|---|---|
| Contents insured for | R500,000 |
| What the contents would actually cost to replace | R800,000 |
| Proportion insured | 62.5% |
| Loss from a burst geyser | R120,000 |
| Claim after applying average, before the excess | R75,000 |
The loss was well inside the R500,000 sum insured, yet R45,000 of it was not paid, because the contents as a whole were insured for only 62.5% of their value.
Why underinsurance creeps in
- Building costs rise. Rebuilding costs track materials and labour, not the price you paid for the property or its market value.
- Renovations and additions are rarely reported to the insurer when they happen.
- Contents accumulate. Electronics, furniture and tools are bought a few at a time and nobody updates the schedule.
- For a business, new stock, equipment and fit-out rarely find their way onto the policy.
How to avoid it
- Insure buildings for the cost of rebuilding, including demolition, rubble removal and professional fees, not the market value.
- Walk through each room and list what it would cost to replace today, at current prices.
- Review sums insured every year and after any renovation or large purchase.
- Ask your broker whether a building valuation makes sense for a larger or older property.
Common questions
Does the average clause apply if my loss is smaller than my sum insured?
Yes. That is exactly when it catches people. If the property as a whole is underinsured, a partial claim is reduced in proportion even when the loss is well below the sum insured.
Is replacement value the same as market value?
No. Buildings are normally insured for what it would cost to rebuild, which can be higher or lower than what the property would sell for. Contents are normally insured for the cost of replacing them new.
Does every policy have an average clause?
Most property policies do, but some sections or products waive it, for example on specified items or where a valuation has been done. Your policy wording states where it applies.
How often should I update my sums insured?
At least once a year, and whenever you renovate, extend or buy something significant.
Getting sums insured right is one of the first things we look at. Book a conversation, or read about our short-term insurance advice.
