Why the Insurer Paid Out Less Than You Claimed: The Average Clause

You insure your home contents for R500,000 because that felt like enough, and because a bigger number meant a bigger premium. You did the sensible things that bring the premium down — better locks, an alarm, armed response — and settled on a figure. Years pass. You buy furniture, replace the television, accumulate the ordinary weight of a life.

Then there is a burglary. You claim R120,000. The insurer assesses your contents as actually worth R800,000, applies a clause you have never read, and pays R75,000.

Nothing has gone wrong procedurally. Nobody has acted in bad faith. That is the average clause working exactly as written — and the most important thing to understand about it is that no regulation protects you from it.

What the clause does

The principle is proportionality. If you insure for less than the true replacement value, the insurer treats you as having carried part of the risk yourself, and settles claims in the same proportion.

The arithmetic is simple enough to do on a phone:

Payout = claim × (sum insured ÷ actual value)

In the example above: R120,000 × (R500,000 ÷ R800,000) = R120,000 × 62.5% = R75,000. You are 37.5% underinsured, so you carry 37.5% of the loss.

It applies to buildings the same way. A house that would cost R2,000,000 to rebuild but is insured for R1,400,000 is 70% covered. A R300,000 fire claim on that building settles at R210,000, and the R90,000 gap is yours.

Note what the excess does after that. The average reduction happens first, then your excess comes off the reduced figure. Two deductions, in that order.

The part that surprises people

Most people, told they are underinsured, reason like this: if the whole place burns down I will be short by the difference, and I accept that risk.

That reasoning is exactly backwards, and it is the reason underinsurance persists.

In a total loss, the average clause changes nothing. You were always capped at the sum insured. Insure for R500,000, lose everything, receive R500,000.

The clause bites on partial losses — a burst geyser, a break-in, a kitchen fire, a storm-damaged roof. Those are the overwhelming majority of actual claims, and every single one is cut by the same proportion.

So being 37.5% underinsured does not cost you 37.5% once, in a catastrophe you consider unlikely. It costs you 37.5% of every ordinary claim you make, for as long as the shortfall exists. The risk you thought you were accepting at the extreme is actually being charged to you in the middle.

No law protects you from this

Here is the finding that matters, and it is a negative one.

South Africa's Policyholder Protection Rules, made under the Short-term Insurance Act, run to dozens of pages and regulate a great deal: what an insurer must disclose, how claims must be managed, what a rejection letter must contain, which policy provisions are void outright.

They contain nothing about underinsurance. The phrase "sum insured" does not appear in them at all. There is no rule capping how severely average may be applied, no minimum tolerance an insurer must allow, and no requirement to warn you that your cover has fallen behind.

The average clause is a contract term. It lives in your policy document, not in the regulations, which means two things follow directly.

It is checkable. Open your policy schedule and wording, and look for a section headed "average", "underinsurance" or "condition of average". Some policies waive average below a stated shortfall, or apply it only past a tolerance. Those variations are commercial, they differ between insurers, and the only way to know yours is to read it.

And it is not something a regulator will rescue you from after the fact. An ombud can examine whether a claim was assessed in accordance with the policy. It cannot rewrite a policy term you agreed to.

What the rules do cover

The Policyholder Protection Rules do have something useful to say about what you pay, even if they are silent on what you are covered for.

Rule 6 requires that a premium — and the extent to which risk is shifted to you through excesses — "must reasonably balance the interests of the insurer and the reasonable benefit expectations of a policyholder", based on assumptions that "are realistic and that the insurer reasonably believes are likely to be met over the term of the policy."

The rules are also firm on add-on charges. An insurer may not charge you any fee or charge in addition to the premium payable under the policy. There are two exceptions: a fee deducted from policy benefits where that deduction is "explicitly provided for in the policy", and a fee permitted by legislation. Where such a fee exists, it must be "clearly and prominently disclosed" to you before the policy is entered into.

So if a charge appears that is not your premium, is not written into your policy, and was not disclosed to you up front, that is worth querying.

How cover falls behind without anyone noticing

Underinsurance is rarely a decision. It is usually the residue of one made years ago:

• The sum insured was set once at inception and never revisited, while replacement costs rose every year.
• Building costs are not house prices. Buildings cover should reflect what it would cost to rebuild, which moves with construction and materials costs rather than the property market.
• Contents accumulate invisibly. Nobody re-tallies a household after each purchase, and the total drifts upward.
• Automatic escalation is not a valuation. An annual uplift applied to a figure that was too low to begin with keeps it proportionally too low.
• Improvements were never declared — a converted garage, solar installation, a new security system or outbuildings.

Insurers rate home cover on the risk they are carrying, which is also why they ask about security measures, armed response and the like. Those affect the premium. They do not affect the average calculation, which cares only about the relationship between your sum insured and the true value.

What to do about it

1. Work out the real number. For contents, walk through the house room by room and total the replacement cost — what it would cost to buy each item new today, not what you paid. For buildings, use a rebuild cost, not the market price or the municipal valuation.
2. Compare it against your schedule. The gap, expressed as a percentage, is the proportion by which every future claim will be cut.
3. Find the clause. Read the average or underinsurance condition in your own wording, including any waiver or tolerance.
4. Decide deliberately. Raising the sum insured raises the premium — that is a real cost and it is a legitimate trade-off to make consciously. What is not legitimate is making it by accident, which is what most underinsured households have done.
5. Declare changes when you renovate, install solar, or add outbuildings.
6. Diarise a review annually, at renewal. This is the single habit that prevents the whole problem.

If a claim has already been reduced and you think the assessment was wrong, ask the insurer in writing for its valuation and its calculation. Underinsurance disputes turn on what the insurer says your things were worth — and that figure, unlike the clause itself, is arguable. If the internal process does not resolve it, the ombud scheme covering non-life insurance can consider whether the claim was handled in accordance with the policy.

Our guides on home contents insurance and reading your policy documents cover the surrounding ground, and excess waivers explained deals with the second deduction. If the premium is the obstacle, ways to reduce home insurance premiums is a better route than quietly under-insuring.

For everything else, start at our money guides.

Frequently asked questions

What is the average clause? A policy term that reduces a claim in proportion to any shortfall between the sum insured and the true replacement value of the insured property.

How is the reduction calculated? Payout = claim × (sum insured ÷ actual value). Contents worth R800,000 insured for R500,000 means every claim settles at 62.5%.

Does the excess come off before or after? The average reduction is applied first, and the excess is then deducted from the reduced amount.

If I am underinsured, does it only matter for a total loss? The opposite. A total loss was always capped at the sum insured, so average changes nothing there. It reduces every partial claim — the burst geyser, the burglary, the storm damage — which is where most claims actually happen.

Is there a law limiting how much can be deducted? No. The Policyholder Protection Rules contain no underinsurance provision and do not use the phrase "sum insured". The clause is a contract term in your own policy.

Do all policies apply average? Not identically. Some waive it below a stated shortfall or apply a tolerance. You have to read your own wording to know.

How should I value buildings cover? On what it would cost to rebuild the structure, which is different from the market value of the property and from the municipal valuation.

Can an insurer charge fees on top of my premium? Not generally. The rules prohibit any fee or charge in addition to the premium, except one deducted from benefits where the policy explicitly provides for it or where legislation permits it — and it must be clearly and prominently disclosed before you take out the policy.

My claim was reduced. What can I do? Ask the insurer in writing for its valuation and its calculation. The clause may be unarguable, but the value it was applied to often is not. If the internal process fails, the non-life insurance ombud can consider whether the claim was handled in accordance with the policy.