Does average only apply to total losses?

No — the opposite. A total loss pays the sum insured whatever the shortfall; average reduces every partial claim by the underinsured proportion, which is why it is felt most on ordinary claims.

Is average applied per item or across the policy?

Per item. The standard wording says every item, if more than one, is separately subject to the condition, so over-insuring one item does not offset a shortfall on another.

Which sections carry an average condition?

Typically buildings, contents, stock, office contents, glass and business interruption. Motor, liability and all-risks sections ordinarily do not, and wordings often disapply average to named extensions — one published wording exempts theft of landlord’s fixtures and accidental damage to aerials, glass, stove glass and machinery. Always read the client’s schedule and section.

Does first-loss cover avoid average?

No. First-loss wordings restate the condition rather than remove it: the insurer pays the proportion of the first-loss amount that the insured amount bears to the total value at risk.

How is average calculated on business interruption?

Against the gross profit the business actually earns — the sum insured is compared with the gross profit rate applied to annual turnover, multiplied where the indemnity period exceeds 12 months, and the compensation is reduced proportionally. Standing charges and working expenses carry their own tests.

/ AVGGUIDE

The average clause: underinsure by a third, lose a third of every claim

Average is the condition that turns an under-declared sum insured into a proportional cut on every claim, not just the ones that exceed it. The standard South African wording puts it plainly: if the property insured is, at the commencement of the damage, collectively of greater value than the insured amount, the insured is their own insurer for the difference and bears a rateable share of the loss. A client insured for R2 million on a R3 million building recovers two-thirds of a R300 000 claim, not all of it — and the shortfall is discovered at the claim, which is the worst moment to learn it. This page sets out the wording, the arithmetic, where average does and does not apply, how it works on business interruption, and what the Record of Advice has to say so the client cannot say they were never told.

Reviewed 8 September 2026 · Broker AI team

The wording

Average is a specific condition of the property section, not a general exclusion. A published South African property-damage wording states it as: “If the Property insured is, at the commencement of any damage to such Property by any peril insured against, collectively of greater value than the insured amount thereon, then the Insured shall be considered as being their own insurer for the difference and shall bear a rateable share of the loss accordingly. Every item, if more than one, shall be separately subject to this condition.” Three things in that sentence do the work:

when

“At the commencement of any damage”

The test is the value at the moment of the loss, not at inception and not at renewal. A sum insured that was right in March is wrong in September if values moved, and the policy measures it in September.

how

“Their own insurer for the difference”

The insured carries the uninsured proportion themselves. It is not a cap on large claims — it is a percentage taken off every claim, including small ones.

each

“Every item… separately subject”

Average is applied item by item, not across the schedule. Buildings over-insured and contents under-insured does not net off; the contents claim is still cut.

The arithmetic, and why partial losses are where it bites

The calculation is the sum insured divided by the value at risk, applied to the loss: claim × (sum insured ÷ value at risk). A client insured for R400 000 on contents worth R800 000 is 50% insured, so a R100 000 partial loss pays R50 000. The intuition brokers meet most often — “I will never lose everything, so I do not need the full value” — is exactly backwards: at 50% cover a total loss pays the sum insured anyway, while every partial loss is halved. Average punishes the common claim, not the catastrophic one. The excess then comes off as well, so the net recovery falls again — and wordings differ on whether average is applied before or after the excess, so the client’s own policy decides that order.

Where it applies — and where it does not

Average is a condition of the sections that insure values: buildings, contents, stock, office contents, glass and business interruption. Wordings then carve out named perils. The published wording above disapplies its average condition to five of its own extensions — theft of landlord’s fixtures and fittings, and accidental damage to aerials, masts and satellite dishes, to glass, to glass of stoves and ovens, and to machinery. Two more shapes matter in practice:

01First-loss cover replaces the ordinary condition with a restated one: the insurer pays the proportion of the first-loss amount that the insured amount bears to the total value, so a first-loss policy is not an escape from average — it re-expresses it.
02Some extensions restate average on a different measure entirely: the wording above applies it to the NUMBER of water receptacles declared against the number in existence, not to their value.
03Motor, liability and all-risks sections are ordinarily written without average — but “ordinarily” is not “always”, and the client’s schedule is what governs.
04Sasria coupons attach to the underlying policy’s terms and conditions, so an underlying average condition reaches the Sasria claim too — while the Sasria sum insured must itself be the full value at risk, VAT-inclusive.

Average on business interruption

The same principle runs through a BI policy, measured against the gross profit the business actually earns. Sasria’s Business Interruption wording says compensation for loss of gross profit “will be proportionately reduced if the sum insured for Loss in gross profit is less than the sum calculated by applying your gross profit rate to the annual turnover”, and that where the maximum indemnity period exceeds 12 months, the appropriate multiple of the annual turnover applies. Standing charges and working expenses each carry their own average test, measured department by department where the business has them. Two consequences for the file:

01A BI sum insured must be the gross profit for the whole indemnity period — 1.5× annual gross profit for 18 months, 2× for 24 — or average applies to the shortfall. Lengthening the indemnity period without raising the sum insured creates underinsurance on the day the change is made.
02A growing business is underinsured by default. The sum insured is set on last year’s figures and tested against this year’s turnover, so a trend allowance is not optional padding.

How to explain it to a client, in one minute

The explanation that lands, and that section 8(2) of the Code asks you to be able to show you gave:

01“Insurance pays the proportion of the loss that you insured. Insure two-thirds of the value and every claim pays two-thirds, before the excess.”
02“It is measured on the day of the fire, on what it would cost to replace, not what you paid or what it is worth second-hand.”
03“It is applied to each item on its own. Being generous on the buildings does not cover a shortfall on the contents.”
04“The claims it hurts most are the ordinary ones — the burst geyser, the break-in — not the total loss.”
05Then give the number: what the sums insured are, what a replacement valuation says they should be, and what a claim would pay at today’s figures.

What the Record of Advice must say

Underinsurance is the commonest complaint a broker files an advice record against. The file should show:

01How each sum insured was arrived at — a valuation, a schedule of assets, the client’s own figure — and that you told them the basis is replacement value at the time of loss (sections 8(1)(a)–(b), 7(1)(a)).
02That average was explained and understood, in the client’s words where possible (section 8(2)); a signed schedule of values is not the same as an explanation.
03Where the client set a sum insured below your recommendation, the section 8(4)(c) alert to the clear risk and a note that they elected not to follow the advice.
04What was reconciled at renewal: escalation applied or declined, new assets added, the BI sum insured against the indemnity period.
05For a commercial client, whether a professional valuation was recommended, and the client’s answer.

Where it goes wrong

The recurring shapes:

01Sums insured carried forward year after year with no escalation, against building costs that moved.
02Market value used instead of replacement value on a building — the two diverge sharply, and the policy pays on the second.
03A client who insured “enough for the worst realistic loss” and did not know average applies to every claim.
04VAT left out of the sum insured, so the declared value is 15% short before anything else.
05The BI indemnity period lengthened without the sum insured moving.
06Improvements, a new outbuilding or new plant never added to the schedule.

Show the client the numbers before the claim does

Broker AI reads the schedules you upload, sets the sums insured against the cover recommended, and drafts the Record of Advice with the average condition explained, the basis of each value recorded, and the client’s decision where they chose a lower figure — for you to review and sign.

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Frequently asked questions

What is the average clause in insurance?: A specific condition of the property sections which provides that if the insured property is, at the commencement of the damage, of greater value than the insured amount, the insured is their own insurer for the difference and bears a rateable share of the loss. In practice the claim is multiplied by the sum insured divided by the value at risk.
Does average only apply to total losses?: No — the opposite. A total loss pays the sum insured whatever the shortfall; average reduces every partial claim by the underinsured proportion, which is why it is felt most on ordinary claims.
Is average applied per item or across the policy?: Per item. The standard wording says every item, if more than one, is separately subject to the condition, so over-insuring one item does not offset a shortfall on another.
Which sections carry an average condition?: Typically buildings, contents, stock, office contents, glass and business interruption. Motor, liability and all-risks sections ordinarily do not, and wordings often disapply average to named extensions — one published wording exempts theft of landlord’s fixtures and accidental damage to aerials, glass, stove glass and machinery. Always read the client’s schedule and section.
Does first-loss cover avoid average?: No. First-loss wordings restate the condition rather than remove it: the insurer pays the proportion of the first-loss amount that the insured amount bears to the total value at risk.
How is average calculated on business interruption?: Against the gross profit the business actually earns — the sum insured is compared with the gross profit rate applied to annual turnover, multiplied where the indemnity period exceeds 12 months, and the compensation is reduced proportionally. Standing charges and working expenses carry their own tests.

This page is general information about the average condition and FAIS advice duties, not legal, compliance or insurance advice. The condition is quoted from one published South African wording and others differ — in particular the list of perils to which average does not apply, and first-loss and number-based restatements. Read the client’s own schedule and section before relying on any of it.