The pro rata condition of average is a policy condition contained in property damage based business insurances to protect the insurer against under insurance by the insured.
Under insurance is where the insured does not insure the risk for the correct amount, giving the insurer a greater exposure to a claim than the premium paid represents.
How does the pro rata condition of average affect claims settlements?
The Pro Rata Condition of Average states that the insurer can reduce a claim proportionately to the amount of under insurance, i.e. if an item of property is insured for only 50% of it’s insurable value only 50% of the amount claimed will be paid insurers.
Some find the logic of this clause a little hard to understand, but it is often easier to grasp the concept in the case of a total loss of the property insured. If you are insured for £50,000, and your total contents at risk is £100,000 at the time of the loss. What do you think the maximum payable by the insurance company would be? Of course it is £50,000.
In reality people often complain that the clause is unfair because if the sum insured is bigger that the total value of the claim then you should be paid in full. The problem with this logic is that the insurance company has not received the full premium it was due for the risk and in fact with the knowledge of the true value at risk the insurer may have made different decisions as regards to premiums, terms and conditions of the policy.
In certain circumstance, if there is very significant under insurance, the insurer may consider this to be a non-disclosure and not pay a claim in its entirety rather than apply Average.
The condition does not apply to household insurance, although the policy will generally include an under insurance clause that enables the insurer to treat a claim in much the same way as they would do if the average condition had been applied.