Insurers rate property cover against the values declared to them. Where the declared value is materially lower than the true reinstatement value, many policies allow the insurer to reduce a settlement in proportion. This is commonly called a condition of average.
The effect applies to partial losses as well as total ones, which is what surprises people. A building insured at half its rebuild cost may see a partial claim reduced accordingly, subject to the terms of the policy in question.
Where the gap usually comes from
- 01Rebuild figures set years ago and index-linked by a percentage that has not tracked actual construction costs.
- 02Market value used in place of reinstatement cost, which are different measures and rarely coincide.
- 03Improvements, extensions and plant upgrades not fed back into the declared values.
- 04Business interruption gross profit calculated on an accounting definition rather than the policy definition.
- 05Indemnity periods that assume a rebuild timeline no longer realistic for specialist plant or listed structures.
What to do about it
Reinstatement cost assessments are the standard route for property. For interruption, the practical step is to review the indemnity period against how long the business would realistically take to return to its previous trading position, including planning, procurement and lead times, not only construction.
Whether average applies, and how, depends on your policy wording. This is general information, not advice about your cover.
General information published by Aldergate. It is not advice, does not take account of your circumstances, and does not alter the terms of any policy. Your own wording, schedule and endorsements govern.