Understand How Underinsurance Reduces Payouts and How to Protect Your Claim.
Written by Darren Carter. Last Updated on October 12, 2026
Many policyholders reasonably expect their insurance to respond when serious damage occurs. However, some policies contain an Average Clause, which may allow an insurer to reduce a claim proportionately where the relevant property, contents or other insured value is lower than required by the policy.
At Independent Loss Adjusters, we help homeowners, landlords and business owners where underinsurance or an Average Clause has been raised during a claim. Because the issue may only become apparent after damage has occurred, it is important to check the policy wording, the sum insured and how that figure was obtained before accepting a reduced settlement.
An Average Clause is a policy term that may allow an insurer to reduce a claim in proportion to the level of underinsurance. Whether it applies depends on the wording of the relevant policy section and the circumstances in which the sum insured was established.
For example, assume a property should be insured for £500,000 but the policy provides cover of £400,000. If the policy contains an applicable Average Clause and the insurer applies it on an 80% basis, a £100,000 claim could be reduced to £80,000, leaving a £20,000 shortfall. This is an illustrative calculation; the actual position will depend on the policy wording and circumstances.
To make this crystal clear, let’s walk through another scenario.
A business owner insures a warehouse for £600,000 when the estimated full rebuild cost is £900,000. The building is therefore insured for two-thirds of that estimated cost.
If the policy contains an applicable Average Clause and the insurer applies it on that basis, a £150,000 fire-damage claim could be reduced to £100,000, leaving the business owner with a £50,000 shortfall.
The claim is below the £600,000 sum insured, but a proportional reduction may still be proposed where an applicable Average Clause operates. This is why the policy wording, valuation evidence and calculation should all be checked.
Underinsurance can arise for several reasons, and its effect during a claim depends on more than the size of any shortfall. Our guide to underinsurance in UK property claims explains what to check if an insurer says the property or other insured values were too low, including rebuild costs, policy wording, valuation evidence and how the original sum insured was established.
Underinsurance can therefore have a significant financial effect on homeowners, landlords and businesses. However, an Average Clause does not automatically apply in every case. The policy wording, information requested when the cover was arranged and the circumstances of the claim can all be relevant.
When an insurer applies an Average Clause, the proposed reduction should be checked against the policy wording, the supporting valuation evidence and the way the sum insured was established.
At ILA, we act for policyholders rather than insurers. We can review the proposed calculation, explain the issues and raise evidence-based questions where the basis of the reduction is unclear or disputed.
Depending on the circumstances, we may help with:
We cannot guarantee that an Average Clause reduction will be withdrawn or changed. The outcome will depend on the policy wording, evidence, information provided when the cover was arranged and the individual circumstances.
Q: What is the purpose of the Average Clause in insurance?
An Average Clause is generally intended to address underinsurance by allowing a proportional reduction where the policy contains the relevant term and the insured value is lower than required. Its effect depends on the exact wording and circumstances.
Q: Does underinsurance mean the Average Clause will automatically apply?
Not automatically. The policy must contain an applicable Average Clause, and the insurer must apply it in accordance with the policy terms and the circumstances in which the sum insured was obtained. The wording, questions asked when the policy was purchased and any guidance or pre-populated figures may all be relevant.
Q: How do I know if I’m underinsured?
For buildings insurance, compare the sum insured with a current professional rebuild cost assessment. Also check whether the policy provides a blanket limit, index linking or other terms that affect how the figure is used. A lower sum insured may indicate underinsurance, but it does not by itself establish that an Average Clause has been validly applied.
Q: Can I challenge the Average Clause?
Yes. Ask the insurer to identify the clause relied upon, explain its calculation and provide the evidence used for the rebuild or replacement value. The sales questions, policy schedule, endorsements and any guidance or pre-populated figures may also be relevant. Independent advice may help where the basis of the reduction is unclear or disputed.
Q: Do all home insurance policies include it?
Not all home insurance policies contain an Average Clause. Where one is included, its wording and application may differ. Check the policy schedule, full wording and any endorsements rather than assuming that a standard formula applies.
Independent Loss Adjusters provides free initial insurance claim advice to homeowners, landlords and businesses. If underinsurance or an Average Clause has been raised during your claim, we can discuss the current position and explain how we may be able to help.
You may wish to contact us if:
Where appropriate, we can review the policy wording, available valuation evidence and proposed calculation. We can also explain the issues that may need clarification before you decide what to do next.
We cannot guarantee that the insurer will withdraw or change an Average Clause reduction. The outcome will depend on the policy wording, evidence and individual circumstances.
Call 0800 002 5178 or request a callback for free initial insurance claim advice.
Head of Marketing & Technology, Independent Loss Adjusters
Posted by Darren - Over 15 years' experience in online marketing within the insurance claims sector and works with ILA's loss adjusters and claims professionals to turn practical claims knowledge into clear, useful guidance for policyholders.
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