When would the average be applied to an insurance claim?

The average clause is applied in situations of underinsurance to protect the insurer from losses resulting from the insured not fully covering the value of their property. When a policyholder chooses to insure an asset for less than its full value, the principle of average comes into play. This means that if a loss occurs, the insurer will only pay a proportion of the claim that corresponds to the level of cover provided versus the actual value of the insured property.

For example, if a property worth £100,000 is insured for only £75,000, and there is a claim for a loss of £30,000, the average clause would mean the insurer pays only £22,500 because the insured amount is 75% of the property's value. This application ensures that the policyholder bears a part of the loss proportional to their level of insurance, encouraging them to insure adequately.

Context around the other options helps clarify the distinction. A franchise generally involves a specific threshold that must be met before a claim is paid, and thus does not connect directly to the underinsurance principle. Similarly, situations where an insurer settles a claim but reserves the right to reclaim from a third party involve liability and subrogation but do not relate to the concept of average. Finally