Published Date: March 31, 2023

Many policyholders are underinsured, whether it be deliberately or ignorantly so. Either way, it may just come back to bite them at the claims stage.

Principle of average

Underinsurance arises when the amount for which an object is insured is less than the actual value thereof. When this happens, it gives rise to the principle of average which allows an insurer to reduce its liability proportionality to the percentage by which an object is underinsured. The rationale behind the average principle is to encourage policyholders to disclose the true value of their insured objects. Put differently, policyholders who try to reduce their insurance premium by misrepresenting the true value of their insured objects are punished through the average principle.


The principle is best illustrated by way of examples:

Home insurance

Mr. Khoza insured his Balitto holiday home for R2,000,000.00 but it actually has a replacement value of R3,000,000.00. If Mr. Khoza’s home is damaged in a flood, his insurance company will send an adjuster to assess the damage and determine the amount of his claim. If the adjuster determines that the cost to repair the damage is R1,500,000.00, the average principle will be applied. This means that Mr. Khoza will only receive a percentage of his claim based on the ratio of his coverage to the actual value of his home. In his case, he will only receive 2/3 (or 66.67%) of his claim, which is R1,000,000.00.

Indemnity insurance

Ms. Jones operates a hair salon. In terms of the law, her public liability exposure is hypothetically capped to R1,500,000.00. Ms. Jones takes out public liability insurance for her nail salon with a coverage limit of R1,000,000.00. If a client slips and falls on a wet floor and sues Ms. Jones for R1,500,000.00, the average principle may be applicable. This means that Ms. Jones may only receive a percentage of her claim based on the ratio of her coverage to the amount of the lawsuit. In her case, she may only receive 2/3 (or 66.67%) of her coverage limit, which is R666,666.67. The remaining R833,333.33 may be her responsibility to pay.

Given the examples above, it is important for policyholders to regularly review and update their insurance coverage to ensure they have adequate protection to avoid their claims being proportionality reduced as a result of being underinsured.

Possible legal recourse for policyholders

Fortunately, in some cases, policyholders who have suffered a loss due to the application of the average principle may have a claim against their insurance brokers. Insurance brokers have a duty of care to their clients to provide adequate advice and ensure that their clients have appropriate insurance coverage to meet their needs. If a broker fails to properly assess the value of a policyholder’s assets or fails to recommend adequate insurance coverage, resulting in the policyholder being underinsured, the policyholder may have a claim for professional negligence against their broker.

Jean-Paul Rudd
Partner | Attorney