Underinsurance and the average clause: the sum-insured conversation to have before the claim

Contents

1. What average actually does to a claim
2. Where the shortfall hides in a Southern African book
3. The renewal notice is a trigger you already get
4. A sum-insured check clients actually answer
5. When the client says no, write it down
6. Frequently asked questions

The assessor agreed the fire damage came to R500 000. The insurer paid R300 000. Nobody declined anything, nobody alleged non-disclosure, and the policy was in force and paid up. The building was simply insured for R1 800 000 when it would have cost R3 000 000 to rebuild, and the average condition did the rest.

That phone call is one of the worst a broker takes, because there is no argument to win. The client is not owed the balance. What they are owed — and what a complaint to the ombud will test — is evidence that somebody asked them, in terms they understood, whether the sum insured was still right.

What average actually does to a claim

Most short-term wordings in the South African market carry a condition of average, sometimes called proportional settlement. If the sum insured is less than the value of the property at the time of the loss, the insurer settles in the same proportion. It applies to partial losses, which is the part clients never expect: they assume a R500 000 claim under a R1 800 000 policy is comfortably covered.

Replacement value at the date of loss	Sum insured	Proportion insured	Loss	Settlement before excess
R3 000 000	R3 000 000	100%	R500 000	R500 000
R3 000 000	R2 250 000	75%	R500 000	R375 000
R3 000 000	R1 800 000	60%	R500 000	R300 000
R3 000 000	R1 200 000	40%	R500 000	R200 000

Two things follow. First, the shortfall is silent: nothing in the monthly premium tells the client anything is wrong, and the policy looks perfectly healthy right up to the loss. Second, the gap grows on its own. Building costs, contents and business assets move with inflation and with what the client has bought since inception, while the sum insured sits where it was set — often at a number picked years ago because it produced an affordable premium. Wordings elsewhere in the region borrow heavily from the South African market, so check whether the same condition appears in your Namibian, Botswanan or Zimbabwean schedules rather than assuming either way.

Where the shortfall hides in a Southern African book

The exposure is rarely spread evenly. In practice it concentrates in a handful of places:

• Buildings insured on a municipal or purchase value. The policy responds to the cost of rebuilding, including rubble removal, professional fees and current building regulations — not to what the property would fetch or what the municipality values it at.
• Household contents that accumulated quietly. A sum insured set when a client moved in at 28 is meaningless at 40, after a decade of appliances, furniture and equipment.
• Business assets and stock at the wrong point in the cycle. A retailer insured on average stock holding is badly exposed in November. Plant insured at book value is exposed always, because a claim is settled on what it costs to replace, not what the balance sheet says it is worth.
• Renovations and additions. A new kitchen, a flat for a family member, a workshop at the back — all raise the rebuild cost and almost none of them are reported to the broker.
• Specified items. Jewellery valued in 2019 and laptops bought at a discount are both listed at numbers that no longer buy the equivalent item.

Motor works differently and is worth separating in your own head before you explain it. A motor claim is normally settled on the value basis in the schedule — retail, market or trade — rather than reduced by average, so the conversation there is about which basis the client is on and whether they understand it. Sasria cover, by contrast, follows the sums insured on the underlying policy, so an underinsured building carries the same shortfall into a riot or strike loss; our Sasria renewal checklist for commercial brokers covers the rest of that check.

The renewal notice is a trigger you already get

Under the Policyholder Protection Rules made under the Short-term Insurance Act, an insurer must give the policyholder notice at least 31 days before the renewal date, setting out the premium payable on renewal, the premium last paid so the client can compare, and any change to terms or conditions with an explanation of what it means.

That notice tells the client what the cover will cost. It does not tell them whether the cover is still the right size — no rule requires the insurer to ask, and the client will not volunteer it. The 31 days are, in effect, a standing calendar of prompts across your book: every week, a batch of clients is being told their price, which is the one moment in the year they are actually thinking about the policy. A brokerage that treats that window as a review window rather than a billing window is doing the job commission is paid for.

A sum-insured check clients actually answer

Long review letters do not get read. A short, specific question on the channel the client already uses does. A workable cadence for a personal-lines or small commercial book:

1. Segment by renewal window, not by alphabet. Work the clients renewing in the next 45 days, so the answer can be endorsed before the anniversary rather than mid-term.
2. Open with the number, not with a request. "Your building is currently insured for R1 800 000. If it burnt down tomorrow, would that rebuild it?" beats "please review your sums insured".
3. Ask one closed question per message. Renovations since last year, yes or no. New vehicle, yes or no. Stock peak above the sum insured, yes or no. Each answer is a decision you can act on.
4. Ask for photographs where it helps. A picture of the extension, the new machine or the jewellery valuation certificate arrives in seconds and lands in the same thread as the answer.
5. Route the yes answers to a human immediately. A client who has just told you they added a workshop needs a call and an endorsement, not an automated thank-you.
6. Close the loop in writing. Confirm the new sum insured, the new premium and the effective date in the same thread, so the client has the trail too.

This is the annual version of the review described in our cover review at policy anniversary use case, and the policy anniversary cover review template gives you wording to adapt. In ORIS, the mechanics are a segment built on the renewal window, a campaign sent from an approved utility template, replies classified as they arrive, and a coverage-gap flag raised on the clients who answer yes — visible in Opportunities & Risks with the rest of the follow-up list. What ORIS will not do is change the policy: it exports CSV, and a person still has to raise the endorsement in your administration system.

When the client says no, write it down

Some clients will decline the increase. That is their right, and it is survivable for you — provided the file shows what you told them. Record the replacement value you discussed or the basis you used, the premium impact of correcting the sum insured, the client's decision in their own words, and the date. A WhatsApp thread does that well, because it is timestamped, attributable and in the client's language, but only if it lives somewhere the brokerage controls rather than on a departing adviser's handset; our guide to FAIS record-keeping for WhatsApp conversations sets out how long to keep it and in what form.

That record is also what you will be asked for if the client later complains. The National Financial Ombud Scheme's non-life division sees a steady stream of disputes where the settlement was correctly calculated and the client simply did not know average existed. If the file shows a plain-language explanation and an informed refusal, the brokerage is in a very different position from one that can only produce a renewal invoice; the same principle runs through our note on claim complaints and the records to keep.

Frequently asked questions

Does average apply to every short-term policy?

No. It is a condition in the wording, so it applies where the wording says it does — typically buildings, household contents, business assets, stock and some all-risks sections. Some products waive it, and some apply it only above a stated tolerance. Read the schedule and the section wording for each client rather than assuming a house rule across your book.

Who is responsible for setting the sum insured, the client or the broker?

The sum insured is the policyholder's declaration. The broker's exposure is not the number itself but the advice around it: whether the basis was explained, whether the question was asked at inception and at review, and whether the answer was recorded. That is why an informed refusal in writing matters more than being right about the value.

Do we need a professional valuation for every client?

No, and suggesting it for every household would be disproportionate. For homes and contents, the insurer's own calculators and current rebuild-cost guidance are usually enough to start a sensible conversation. For commercial buildings, plant and high-value specified items, a professional valuation is the safer route, and the cost is small against the shortfall it prevents.

Can we simply raise the sums insured ourselves at renewal?

Not unilaterally. You can propose an increase, explain the premium effect and act on the client's instruction, but changing a client's declared value without their agreement creates a different problem. Send the proposal, keep the answer, and endorse on the strength of it.

What if the client never replies to the review message?

Treat silence as an open item, not as consent. Follow up once by another route, note the attempts on the file, and flag the account for the next renewal cycle. A documented attempt to review is worth a great deal more at complaint stage than a book where nobody asked at all.