What this calculator does
The condition goes by several names, coinsurance in North America and the average clause elsewhere, and it does something most policyholders do not expect. If your sum insured falls short of a required percentage of the full value, the insurer does not simply cap the payout at the sum insured. It reduces every claim in proportion, including small ones.
That is the part that surprises people. Insured for $600,000 against a required $640,000, a $120,000 loss pays $112,500 before the excess, not the full $120,000, even though the loss is nowhere near the sum insured. Being 6.25 per cent short costs 6.25 per cent of every claim.
The formula
The payout is the loss multiplied by your sum insured divided by the required sum insured, which is the full value times the coinsurance percentage. That ratio is capped at 1, so carrying more cover than required does not increase a payout. The excess then comes off the result. The requirement is assessed on the value at the time of the claim, not at the time the policy was written.
| Term | Meaning |
|---|---|
| Coinsurance requirement | The share of full value you must insure, commonly 80 or 90 per cent. |
| Average clause | The same condition under its other name, used in the UK, Australia and much of the Commonwealth. |
| Required sum insured | Full value multiplied by the coinsurance percentage. The figure you must at least reach. |
| Proportion insured | Your sum insured over the required sum insured, capped at 1. Every claim is multiplied by it. |
The inputs explained
| Field | What to enter |
|---|---|
| Full value at risk ($) | Full value at risk at the time of the claim, which for a building is the rebuild cost rather than market value. |
| Sum insured ($) | The sum insured on the policy. |
| Coinsurance requirement (%) | The coinsurance or average percentage in the policy wording. 80 per cent is common but it is not universal. |
| Loss suffered ($) | The size of the loss being claimed, not the total value. |
| Excess ($) | The excess or deductible, taken off after the proportional reduction. |
When to use it
Seeing why small claims are hit too
Set the loss to $20,000 against the default underinsurance. The payout is $16,250 rather than $17,500, because the same proportion applies to a small claim as to a large one. This is the part that is routinely misunderstood.
Finding the sum insured that clears the condition
The shortfall output is the gap to close. Note that you only need to reach the required percentage, not the full value, which is the point of the clause: it asks you to be broadly honest rather than exact.
Checking whether over-insuring helps
Raise the sum insured above the full value. The proportion caps at 100 per cent and the payout does not improve, so premium spent above the requirement buys nothing on this condition.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
What does each level of underinsurance cost?
Only the sum insured changes. The required figure is $640,000 throughout.
| Sum insured | Payout after the penalty | Proportion you are insured for | Out of pocket in total |
|---|---|---|---|
| $400k | $72,500.00 | 62.5% | $47,500.00 |
| $500k | $91,250.00 | 78.1% | $28,750.00 |
| $600k | $110,000.00 | 93.8% | $10,000.00 |
| $640k | $117,500.00 | 100.0% | $2,500.00 |
| $800k | $117,500.00 | 100.0% | $2,500.00 |
Does the penalty scale with the loss?
The underinsurance is identical in every row. Only the size of the loss changes.
| Loss suffered | Payout after the penalty | Reduction from underinsurance | Out of pocket in total |
|---|---|---|---|
| $20k | $16,250.00 | $1,250.00 | $3,750.00 |
| $60k | $53,750.00 | $3,750.00 | $6,250.00 |
| $120k | $110,000.00 | $7,500.00 | $10,000.00 |
| $400k | $372,500.00 | $25,000.00 | $27,500.00 |
| $800k | $597,500.00 | $200,000.00 | $202,500.00 |
Questions
Is coinsurance the same as the average clause?
Yes, in effect. Coinsurance is the North American term and average is used in the UK, Australia and much of the Commonwealth. Both reduce a claim in proportion to any shortfall in the sum insured.
Does it only apply to total losses?
No, and that is the common misunderstanding. The reduction applies to every claim, so a small partial loss is underpaid by the same percentage as a large one.
Is the requirement assessed when I buy or when I claim?
At the time of the claim, on the value then. A sum insured that was adequate three years ago can fail today after building cost rises, which is why the figure needs reviewing rather than rolling over.
Should I insure for the full value to be safe?
You only need to reach the required percentage, and going above the full value buys nothing on this condition because the proportion caps at 1. Whether extra cover is worthwhile for other reasons is a separate question.
Do all policies have this condition?
No. Some residential policies are written on a total replacement or sum-insured-plus basis without an average clause. Check the wording rather than assuming either way, and a licensed insurance professional can confirm it.
To work out the value the condition is tested against, see rebuild cost sum insured. For the excess side of a claim there is deductible break-even, and premium per $1,000 compares the cost of cover.