Legal Process

Question 1

The issue in this case is whether or not Paul and Sue are entitled to claim the $120,000.00 damage from their insurance company.

In this case the insurance policy contains an average clause. The unusual impact of such a clause is that if you underinsure i.e. not insure to the full value or the amount of insurance limit purchased is inadequate, your claim may be reduced in proportion to the amount of the under-insurance. Average clauses only apply where there is a partial loss. If there is a total loss the amount paid will be the sum insured. The average formula is:

(Value of property stated in the policy) divided by (Actual value of the property) X (Actual loss) = (Amount paid).

In this case the property is insured for $200,000.00 and its actual value is $300,000.00, and $120,000.00 damage is caused to the property, the amount of compensation payable by the insurer would be:

$200,000.00 / $300,000.00 X $120,000.00 = $79,999.99.

The insured is unable to recover the whole of the loss. The reason is because the insured is carrying their own insurance for the difference between the actual value and the insured value. If the insured property had been totally destroyed the insured would have received $200,000.00.

Section 44 of the Insurance Contracts Act, 1984 (Cwlth) limits the average clause so that   they are partly protected from the impact of an average clause. It gives the homeowner a buffer of 20%. The Act provides that an insurer will be unable to rely on an average clause unless the insured has been advised in writing of the clause and effect of such a clause, before the contract is made. Further, the Act provides that an average clause will be ineffective where the sum insured is 80 per cent or more of the value of the property. Where the sum insured is less than 80 per cent of the actual value of the property, the Act provides that the amount of reduction will be calculated by a formula based on 80 per cent of the value of...