Averaging
Averaging is a clause in property insurance policies that reduces a claim payout in proportion to the degree of under-insurance. If your sum insured represents only 80% of the true replacement value, the insurer will pay only 80% of any claim — regardless of whether the claim would have been within the sum insured.
How the averaging formula works
The standard averaging formula is:
Payout = (Sum insured ÷ True value) × Claim amount
Example: Your business contents are worth £200,000 but you insure them for £150,000 (75% of true value). You suffer a fire and make a claim for £80,000. Averaging reduces the payout:
The policyholder receives £60,000 for a £80,000 loss — a shortfall of £20,000 that must be funded personally. And this is before any policy excess is deducted. The consequences of under-insurance are explained further in our under-insurance glossary entry.
When averaging applies
Averaging is most commonly found in:
- Commercial property and business contents insurance — standard in most commercial policies; the insurer will check valuations at claim time
- Buildings insurance — if the declared rebuild cost is less than the actual rebuild cost, averaging will reduce any claim
- Home contents insurance — many standard home policies include averaging, though some remove it for sums insured below a threshold
Averaging may not apply if the policy is written on a "declaration-linked" basis where the insurer accepts the declared sum insured as adequate. Always check the policy wording. For business insurance, see our guide on business interruption insurance where sum insured accuracy is equally critical.
How to avoid averaging
- Calculate the true full replacement cost — not market value, purchase price, or a rough estimate
- Review the sum insured annually and after improvements, acquisitions, or cost inflation
- For commercial property, commission a professional rebuild valuation periodically
- For business contents, maintain an asset register with current replacement values — see our business contents guide for a practical calculation framework
Averaging FAQ
Frequently asked questions
- Averaging applies most commonly to property insurance (buildings, contents, commercial property) and business insurance where a sum insured must be declared. It is less relevant to policies where the insured amount is not user-defined — for example, life insurance pays the sum assured in full regardless of under-insurance as there is no "correct" value for a life. Health and motor liability policies typically do not use averaging either. Check your policy schedule and policy wording for the specific clause.
- A partial payment may occur for several reasons — an excess, a sub-limit, or an exclusion. Averaging is specifically the proportional reduction caused by under-insurance: the ratio of the sum insured to the true replacement value is applied to the claim amount. These can compound: if a policy has a £500 excess and averaging applies at 80%, a £10,000 claim would first have the excess deducted (£9,500) and then averaging applied (£7,600 payout). See under-insurance for the full picture.
- Ensure your sum insured reflects the true full replacement cost of everything covered — not what you paid, not market value, but what it would cost to replace or rebuild from scratch at today's prices. Review the sum insured annually and after any significant changes (home improvements, new equipment, building cost inflation). For commercial property, consider a professional valuation. See our guide on business contents insurance for a practical approach to calculating the right sum insured.
- A new-for-old basis addresses how a claim is settled (replacement cost rather than depreciated value) but does not eliminate averaging. If the sum insured itself is too low, averaging will still reduce the payout — even on a new-for-old policy. The two concepts are separate: the basis of settlement determines whether depreciation is deducted; averaging determines whether the full sum insured is paid. Both must be right for full protection.