A claim can be accepted in full and still settle for far less than the loss. The usual reason is the average clause: a condition in almost every commercial and property policy that reduces the settlement in proportion where the sum insured is lower than the value the policy required. It is rarely discussed when the policy is arranged. It is raised after a fire or a flood.
What the average clause actually does
The arithmetic is worth seeing before the definitions.
A commercial building is insured for £600,000. After a fire, its reinstatement value is assessed at £1,000,000, so the property was insured for 60% of its value. The damage comes to £200,000. Average applies the same proportion to the claim, and the settlement becomes £120,000.
The reduction is applied across the claim, not to the shortfall. A partial loss is cut by the same proportion as a total one, so it reaches every water-damaged ceiling and scorched roof section, not only the catastrophic events people picture when they think about being underinsured.
Declared value, sum insured, and the basis of cover
The declared value is the cost of reinstating the property at the start of the policy year. The sum insured is normally that figure plus a provision, often a percentage above the declared value or a “day one” uplift, covering inflation and the time reinstatement takes. Insuring the declared value with no provision is one common route into average. Setting it from a market valuation or a purchase price is another: neither measures what it costs to rebuild.
The basis of cover matters as much. A reinstatement policy pays to put the property back as it was, with no deduction for age or wear; an indemnity policy pays the depreciated value. That decides machinery, plant and stock settlements more often than buildings. The schedule states which basis applies, and sections of one policy often differ.
Why so many policies are underinsured
Almost never through anything deliberate. The causes are structural:
- The sum insured was set when the policy was taken out and renewed since without being revisited.
- Build costs have risen faster than the index linking applied at renewal.
- Extensions, outbuildings, racking or plant added since were never added to the figure.
- Statutory and professional costs were left out. On an older building, meeting current building regulations can cost materially more than the original construction did.
How average appears on a live claim
It is not usually announced. The insurer’s loss adjuster commissions or prepares a valuation, it comes back above the declared value, and a proportional reduction appears in the settlement calculation, sometimes named as average and sometimes visible only as a percentage applied to the total. Once a settlement figure has been accepted the position is very difficult to reopen.
What can be challenged, and what cannot
This is the part most pages about underinsurance avoid.
Where a property genuinely was insured for less than its reinstatement value, average is a term of the policy and it applies. No assessor can argue that away, and any firm suggesting otherwise should be treated with caution. The insurer makes the final decision on policy cover.
What can properly be examined is the valuation the reduction rests on, because it is an estimate, and estimates carry assumptions:
- The scope. Whether every structure counted forms part of the insured risk, and whether anything has been counted twice.
- The basis. Whether the figure was built on reinstatement, and whether that matches what the policy specifies.
- The rates and specification. Whether the costs reflect the building as it actually was, rather than a generic specification.
- The date. Which year’s costs were used, and whether index linking or a day-one provision has been taken into account.
- The wording. Provisions above the declared value that reduce or remove the effect of average are not always applied.
We prepare and present the strongest legitimate claim supported by the policy wording and evidence. On an underinsurance question that means testing the valuation, not disputing the term.
Northern Ireland and Scotland
Reinstatement costs are not uniform across the UK, and two regulatory differences bear on them.
In Northern Ireland, building work is governed by the Building Regulations (Northern Ireland) 2012, enforced by the Building Control department of the relevant district council, which assesses plans in advance and inspects the work.
In Scotland, a building warrant must be granted under the Building (Scotland) Act 2003 before work begins, and warrantable work carried out without one is an offence. That sequencing carries professional fees and lead time, and both belong inside a reinstatement figure.
Case study: a proposed 20% average deduction withdrawn after valuation review
Client-supplied and verified, 2026-08-21.
An engineering and fabrication business in Edinburgh suffered a fire at its industrial premises in February 2026, damaging the workshop structure and equipment areas, with heat, smoke and soot extending into adjoining offices.
The building was declared at £1 million. The adjuster assessed the value at risk at about £1.25 million, putting the property at 80% of reinstatement value, and a 20% average reduction was proposed.
PCLA re-measured the unit, established which structures formed part of the insured risk, reviewed the building specification, and re-costed the main elements including steelwork, roofing, cladding, internal partitions and office finishes. The review identified duplicated allowances, rates not supported by the property specification, and ancillary areas valued on a basis that did not match the pre-loss building.
The revised reinstatement assessment came to approximately £985,000, supporting the £1 million declared value. The insurer accepted it and withdrew the proposed average. The claim settled at £418,000.
Why it matters: this does not show underinsurance being defeated. It shows the property was not underinsured, and that the valuation suggesting otherwise did not survive being checked against the building.
If average has been applied to your claim
- Ask for the valuation the reduction is based on, in writing, including its basis and its date.
- Find the declared value in your own schedule, and how it was arrived at.
- Read the wording for any percentage provision or day-one uplift above the declared value.
- Do not accept or reject the settlement calculation until the valuation behind it has been read.
The earlier you involve us, the more we can do. The best time to call is before you notify your insurer, or before you accept a settlement figure.
For a commercial property loss, see commercial claims; residential landlords should start with landlord claims. Where trading has been interrupted as well, a separate calculation applies, covered on our business interruption claims page. Our fire damage and escape of water guides cover those perils.
Frequently asked questions
What is the average clause in an insurance policy?
A condition that reduces a settlement in proportion where the sum insured is less than the value the policy required. A property insured for 60% of its reinstatement value can settle at 60% of the loss.
Does average apply to small claims?
Yes. It applies across the claim rather than to the shortfall alone, so a partial loss is reduced by the same proportion as a total one.
What is the difference between declared value and sum insured?
The declared value is the reinstatement cost at the start of the policy year. The sum insured is normally that plus a provision for inflation.
Why is my rebuild cost higher than what I paid for the building?
Market value is what a buyer will pay. Reinstatement cost covers demolition, site clearance, construction, professional fees and statutory approvals.
Can an average deduction be challenged?
Not the term itself, where the property genuinely was underinsured. The valuation it rests on can be: its scope, its basis, the rates used, the date of the costs, and any provision above the declared value.
What is the difference between reinstatement and indemnity cover?
Reinstatement pays to put the property back as it was. Indemnity pays the depreciated value.
Does index linking prevent underinsurance?
Not reliably. It follows general cost inflation, which can lag build costs, and it misses extensions or plant added since.
Do you assess rebuild costs at renewal?
No. PCLA acts on live insurance claims. Reinstatement scoping and costing is done as part of a claim, not as a standalone valuation survey.
Talk to us about your claim
PCLA are independent loss assessors. We act solely for policyholders, not insurers. If average has been raised on your claim, call before you respond to the insurer.
Northern Ireland: 028 9581 5318 · Scotland: 0141 461 2406
Property Claims Loss Assessors Ltd, trading as PCLA, is a claims management company authorised and regulated by the Financial Conduct Authority, FRN 933781.
