# Frequent question: What is average clause in a fire insurance policy?

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## How does the average clause work?

If your insurance policy has an average clause this may allow insurers to reduce their liability for the damage in proportion to the amount of under insurance. … If your house is insured for 75% of its rebuilding cost insurers will pay 75% of the agreed cost of the damage if average applies.

## What is an average clause in an insurance policy?

So what is an average clause in an insurance policy? It is a clause requiring that you bear a proportion of any loss if your assets were insured for less than their full reinstatement value.

## What is average clause?

1 : a clause in an insurance policy that restricts the amount payable to a sum not to exceed the value of the property destroyed and that bears the same proportion to the loss as the face of the policy does to the value of the property insured — compare coinsurance.

## Why average clause is included in the insurance policy to?

The Average Clause is there to encourage insurance customers to declare honest values when insuring their valuables. It is also there to ensure a fair premium is always contributed into the pool of premiums from which everyone’s claims are paid.

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## Where is average clause is applicable?

The average clause only applies when the sum insured is less than the actual value of the goods or the property.

## Why is average clause applied?

Average Clause will be applicable only when the amount of policy is given in the problem and the amount of policy is less than the value of stock destroyed by fire or value of stock is more than the amount of claim.

## How do you find the average of a clause?

The actual amount of claim is determined by the formula:

Claim = Loss Suffered x Insured Value/Total Cost. The object of such an Average Clause is to limit the liability of the Insurance Company. Both the insurer and the insured then bear the loss in proportion to the covered and uncovered sum.

## How does average work in insurance?

Simply the Condition of Average says that if you declare an insured value that is X% of the true value, then you have only paid X% of the premium due and will only receive X% of your claim.

## How do you treat salvaged goods in fire insurance claims?

Deduct the amount of salvage from the value of stock on the date of fire to get the value of loss of stock. By Stock on the date of fire XX (bal. fig.) Illustration 1: Find out sales when cost of goods sold is 80,000 and Gross Profit ratio 20%.