Fire Insurance: Principle of Average Clause

Many of you might be asking how much should you insure your property. Some of you may want to increase the value of your property not minding the annual premium, thinking you might get more if the loss arises. Some of you may want to decrease the val

ue of your property thinking of saving a few bucks for the annual premium and getting the whole insured amount because you know that it is under insured.

We will now answer the unanswered! We will now explain why most Pinoy hated their insurance companies and agents before!

After 3 full years in the non-life insurance business, i ve seen all sorts of personalities. Some are honest and prudent and most are not. This goes to both the insurance companies and the people. The correct answer to this question is… If your property including your furnitures is below 3M, you should declare a value that will suffice to replace your investments if you will build your property now. Remember, the inflation rate in RP is 10% every year. Meaning if that 3M pesos was your construction value 5 years ago,then you are under insuring it, you can’t build a new building with the same cost. It should be around 4M-5M now.
Under insurance means If an item is underinsured and the insured risk occurs then the insured will only get a proportion of the damage that occurs.
For example a house worth P400,000, is insured for P300,000 and a fire occurs in the kitchen causing P100,000 damage. As the house is only insured for ¾ of its value. The insured will only get ¾ of the damage. That is P75, 000.
The average clause applies, when a partial loss occurs and the risk is underinsured.-Annie Patton.

This is the principle of Average Clause. I believe this very important clause was ignored by many in the Philippines thus leaving all insured buried with regrets after the loss and of course the fastest way to relive pain is to blame it on the agent or insurance companies.

If your property is more than 5M, its best to have an independent appraiser to know the actual value and replacement value of your property today. This should prevent you from under insurance and over insurance. Thus, saving you money now with annual premium and in the future for possible losses.

If your property is used for business e.g. warehouse or factory, most of you will not mind the structure now, for reasons that its an old building its only a warehouse, etc. Your not a businessman in that case! For the inventories, you should declare the average daily stocks on hand to suffice the lost in

case it happens now!

If you are renting, you can insure the furnitures and equipments even without insuring the house or condo but its always best to ask your landlord if he/she wants insurance as well.

If you notice, i never wrote examples of Overinsurance, i never encountered it yet. However, people who tries to over insure will surely commit either an arson or a suicide. This is purely logical answer. hehe! I haven’t met someone who wants to pay more and gets less!

In a nut shell, Insurance will only bring you back at your current state before the loss arises. No one should get rich or poor via insurance. Unless, other wise the average clause is ignored!

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