"Underinsurance" redirects here. For this issue in health insurance, see Underinsurance (healthcare).
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Illustration of the partial payout of Sum Insured against probability of occurrence
Condition of average (also called underinsurance[1] in the U.S., or principle of average,[2]subject to average,[3] or pro rata condition of average[4] in Commonwealth countries) is the insurance term used when calculating a payout against a claim where the policy undervalues the sum insured. In the event of partial loss, the amount paid against a claim will be in the same proportion as the value of the underinsurance.[5]
The formula used is
[6]
where Payout is the amount paid out by the policy, Adjusted Loss is the realisable amount from the amount claimed against the policy after a loss, Sum Insured is the maximum amount to be paid out by the policy, and Current Value is the value the policy should be insured for. Underinsurance occurs when Sum Insured is less than Current Value.
Sum Insured is the maximum amount that can be paid out and is only paid out in cases of total destruction. Where partial destruction occurs (a more common occurrence than total destruction), Payout is pro rata in line with the underinsurance. This is due to insurance companies basing the premiums on their risk of losing the full Sum Insured against total destruction events.
^Lynne McChristian (2010-02-01). "Explaining the Pitfalls of Underinsurance". Florida Underwriter Magazine: February 2010 Issue. Summit Business Media. Archived from the original on 2012-07-30. Retrieved 2010-03-11.
^Brown, Robert Henry (1978). Marine insurance - the principles. Witherby. ISBN 978-0-900886-38-6.
^"Average". Lloyd's Insurance Glossary. Society of Lloyd's. Retrieved 2010-10-18.
^Rees, W H; R E H Hayward (2001). Valuation: Principles Into Practice. Elsevier. ISBN 978-0-7282-0347-1.
^Angus Maclean (2009). "Don't let under-insurance be an average condition" (PDF). Newsletter 2009. Lycetts Holdings Limited. Retrieved 2010-10-18.
^Grant Thornton (Ireland) (November 2008). "The Home Construction Industry and the Consumer in Ireland, Volume 4" (PDF). Review of insurance issues. National Consumer Agency. p. 27. Retrieved 2010-02-23.
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