Mrs. Lam took out shop insurance for her boutique a year ago. She opted for a sum insured of HK$100,000 with an excess of HK$5,000 to cover all contents including decorations and stock in her boutique.

As her business had been earning profits steadily, she decided to renovate the boutique to attract more customers. After renovation, the value of her property in the boutique increased from HK$100,000 to HK$200,000.

Unfortunately, a vehicle accidentally crashed into her boutique. The new fixtures and fittings as well as new stock arrivals were damaged. Mrs. Lam immediately filed a claim with a loss amount totaling HK$30,000 with her insurance company. After evaluation of the loss, her insurance company applied the average clause to the claims adjustment as the value of the boutique at the time of loss was greater than the sum insured in her insurance.

In this situation, Mrs. Lam had to bear a ratable proportion of her loss according to the extent of under insurance.

As a result, including the HK$5,000 excess, Mrs. Lam had to bear a HK$20,000 (HK$5,000 + HK$15,000) reduction of her claim because her insurance company would only pay HK$10,000 for the loss.

In the case above, Mrs. Lam should have instructed her insurance company to increase the sum insured of her shop insurance immediately after the renovation. Average clause is commonly applied to commercial property insurance such as office insurance, shop insurance etc. This also applies to insurance on buildings. Average clause is applicable when the property and contents insured at the time of loss or damage is collectively of greater value than the sum insured. The insured person will be deemed to be the insurer to the extent of under insurance, bearing a ratable proportion of the loss.

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