Under-insurance and the average clause explained

What is under-insurance?

Under-insurance means that the amount a policy covers is lower than what it would cost to repair, rebuild or replace what is insured. A home can be under-insured on the buildings side, the contents side or both. The shortfall is usually discovered at the worst moment, when you claim.

Olvian is not an insurer, broker or financial services provider. It passes a person's request to licensed providers, who pay Olvian a fee and contact the person. This guide explains the idea and the rules around it. It does not say how much cover anyone should have; the licensed provider or adviser who contacts you answers that.

What is an average clause?

An average clause is a term in some policies that deals with under-insurance. In general terms, it allows the insurer to reduce a claim where the amount insured is lower than the full value of what is insured. The exact way the reduction is worked out, and which sections of a policy it applies to, is set by the policy wording. It is not set by one rule that applies to every policy.

You will see the idea at work in a complaint the FAIS Ombud resolved in 2025. A widow inherited a homeowner's policy that was later found to be under-insured. According to the Ombud's summary, "the payout was significantly reduced due to the application of the average clause". The complaint was against the financial services provider, not the insurer, and the Ombud found the provider had breached its obligations by failing to document or explain the implications of under-insurance. The parties settled.

That case is one example, not a general rule. It shows two things. The clause exists in real policies, and the effect on a claim can be large.

The Policyholder Protection Rules also use the phrase "principle of average". Rule 2A.4.4 says a microinsurance policy may not provide that any of its benefits is subject to it. Whether a particular home policy is a microinsurance policy is a matter for the insurer to state.

How do I find out whether a policy has one?

Ask the licensed provider, and then look at the policy. Two disclosure rules help.

Before you buy. Where the insurer sends you a quotation with detailed information about a specific policy, or sells to you through direct marketing, Rule 11.4.2 requires it to tell you the nature and extent of the policy benefits and "concise details of any significant exclusions or limitations". Rule 11.1 says a significant limitation includes "any limit on the amount or amounts of cover".

After you buy. Rule 11.5.1 requires the insurer, no later than 31 days after the policy starts, to give you comprehensive details of all exclusions and limitations, and Rule 11.5.3 requires a copy of the policy in the same period. Look in those documents for the words "average", "proportion" or "under-insurance", and ask the provider to point to the clause if you cannot find it.

If a term is confusing, Rule 11.3.5 says the insurer must take particular care to explain terms "that could not reasonably be expected to be understood". You are entitled to ask.

Does the insurer have to tell me to keep my cover up to date?

Yes, in one specific respect. Rule 11.5.1(e) says the information the insurer gives you after the policy starts must include "any obligation to monitor cover, and that the policyholder may need to review and update the cover periodically to ensure it remains adequate".

The Rule does not tell you what number is adequate, and neither does Olvian. It does mean the question of whether cover is still right is one you can raise with the insurer at any time, and one the insurer should have told you about in writing.

Things that commonly change over time, and are worth mentioning to the licensed provider when they do, are building work, new appliances and electronics, valuable items acquired, or a change in who lives in the home. Tell the provider about them so that the policy schedule reflects your home as it is now.

What do I have to tell the insurer?

Rule 11.4.2 says the insurer must tell you about "any obligation to disclose material facts, including information to ensure that a policyholder knows what must be disclosed as well as the consequences of non-compliance". Rule 11.5.1(i) goes further. Within 31 days after inception, the insurer must give you in writing "the representations made by or on behalf of the policyholder to the insurer which were regarded by that insurer as material to its assessment of the risks under the policy".

That second rule is useful. It means you can read, in the insurer's own document, what the insurer thinks you told it. If a description of the home, its size, its finishes or its contents is wrong, correct it straight away, in writing.

What if my claim is reduced?

You have rights, and they start with a written explanation.

1. Ask how the figure was reached. Rule 17.8.3 says the insurer must disclose to the claimant the information required, any time limits and any excesses. If the insurer repudiates or disputes a claim or the amount of a claim, Rule 17.6.3 requires a plain-language notice with the reasons "in sufficient detail to enable the claimant to dispute such reasons".
2. Use the representation window. The notice must say that you may make representations to the insurer within a period of not less than 90 days after receiving it (Rule 17.6.3(b)). If you do, Rule 17.6.5 says the insurer must tell you its decision in writing within 45 days of receiving your representation.
3. Use the internal review. The notice must set out the insurer's claim escalation and review process (Rule 17.5).
4. Complain to the ombud. The notice must also set out your right to lodge a complaint with a relevant ombud, with contact details and time limits (Rule 17.6.3(d)).

Our guide on claims, excesses and complaints goes through these steps in more detail.

Who can help if I think I was not told?

Two routes exist, and they cover different things.

• The insurer's own complaints process, then the National Financial Ombud Scheme if you are not satisfied. The NFO says it is free and that it can look at a complaint only after you have lodged it first with your bank, credit provider or insurer.
• The FAIS Ombud, for complaints about the advice or conduct of a financial services provider, as in the 2025 case above. Whether a complaint belongs here or with the NFO depends on who gave the advice and what went wrong, so ask the ombud's office which applies.

The Financial Sector Conduct Authority is the conduct regulator. It says it assists with complaints about how regulated companies conduct themselves, but cannot assist with claim disputes and contractual disagreements, which go to the relevant ombud.

What should I ask the licensed provider?

1. Does this policy have an average clause? Where is it in the wording?
2. How is the figure for buildings and for contents shown on the schedule, and what does the policy say about how a claim is settled?
3. How do I update the figures, and what do I need to tell you when something changes?
4. What are the representations I am recorded as having made?

Sources

Checked on 31 October 2026. Olvian is not a financial services provider and this guide is information, not advice.

• Policyholder Protection Rules (Short-term Insurance), 2017, Rule 11: disclosure, Government Notice 1433, Government Gazette 41329, 15 December 2017, as amended by Notice 996, Government Gazette 41928, 28 September 2018.
• Rule 17: claims management
• Rule 2A.4.4 (no principle of average in microinsurance policies), in the National Treasury consultation text of the September 2018 amendments
• FAIS Ombud: case summary on under-insurance and the average clause (FAIS-73058-24/25)
• National Financial Ombud Scheme
• Financial Sector Conduct Authority: consumer page