Average Clause Explained: Formula, Examples and Payouts

By Jim Flannery ACII, Brand Ambassador, OMC Claims. Over 40 years in insurance claims and a founding member of the Irish Claims Consultants Association.

Home insurance protects against fire, storm, escape of water and the other things that can go badly wrong in a house. But one provision buried in most Irish policies decides how much of that protection you actually get when you claim: the average clause. It surprises more policyholders at claim time than any other policy term, and understanding it now, before you ever need to claim, is the cheapest lesson in insurance. If it has already been raised on a live claim, a loss assessor can review the figures before you accept any reduction.

What is the average clause?

The average clause (also called the condition of average) is a rule in most buildings and contents policies that reduces a claim payout when the property is insured for less than its full reinstatement value. In plain terms: if you have bought cover for only part of the risk, the insurer pays only that part of any claim. The clause turns underinsurance from an abstract policy problem into a concrete deduction from your settlement.

The average clause formula

The formula insurers apply is:

Settlement Amount = (Sum Insured ÷ Value at Risk) × Value of Loss

• Sum insured is the amount your property is insured for under the policy, and the maximum the insurer will pay.

• Value at risk is the full cost of rebuilding your property at the time of the claim, sometimes called the reinstatement value. See our guide to getting the buildings sum insured right.

• Value of loss is the cost of the damage you are claiming for, from a modest repair to a full rebuild.

• Settlement amount is what the insurer pays after average is applied.

Worked examples

Example 1: fire damage in an underinsured home

Your home’s rebuild cost is €400,000, but it is insured for €300,000. A fire causes €50,000 of damage.

Claim Amount = (€300,000 ÷ €400,000) × €50,000 = €37,500

The insurer pays €37,500 of a €50,000 loss, leaving you €12,500 out of pocket, before any excess is deducted.

Example 2: a partial loss

A kitchen fire causes €30,000 of damage. The rebuild cost is €400,000 and the sum insured is €320,000.

Claim Amount = (€320,000 ÷ €400,000) × €30,000 = €24,000

You cover the remaining €6,000 yourself, even though the loss was well within the sum insured.

Example 3: a total loss

The same property is destroyed entirely. The rebuild cost is €400,000 and the sum insured is €320,000.

Claim Amount = (€320,000 ÷ €400,000) × €400,000 = €320,000

The settlement is capped at the sum insured, leaving an €80,000 shortfall on the cost of rebuilding your home.

How much of your claim would be paid?

The pattern is simple: whatever percentage of the rebuild cost you have insured is the percentage of any claim you can expect to receive.

Figures are before any policy excess and are illustrative; individual policies can differ in how average is worded and applied.

Why does the average clause exist?

From the insurer’s side, premiums are priced on the sum insured. A policyholder who insures €400,000 of risk for €300,000 has paid a premium for three quarters of the exposure, so the clause aligns payouts with premiums and keeps pricing fair across all policyholders. Whatever you think of the mechanics, the practical message is the same: the sum insured is not an administrative detail, it is the number your entire protection is built on.

Partial loss vs total loss: average applies to both

The single most common misconception about the average clause is that it only matters if the house burns to the ground. It applies to every claim on an underinsured policy, however small. A burst pipe, a chimney fire, a storm-damaged roof: each payout is reduced in the same proportion as the underinsurance. Policyholders usually discover this on a modest claim, which is a painful way to learn it.

The average clause and rising Irish rebuild costs

The reason the average clause matters more now than at any point in recent memory is construction inflation. Industry estimates confirm that Irish house rebuilding costs have risen by roughly a third since 2021, and the Society of Chartered Surveyors Ireland’s most recent guidance recorded national average construction costs rising again by around 7% year on year. Insurer research has suggested that as many as one in five Irish homes is underinsured. The practical effect is drift: a sum insured that was perfectly adequate a few years ago can now sit well below the true rebuild cost without the policyholder changing a thing, and it is the average clause that converts that drift into a deduction on the day of a claim.

Common misunderstandings

• “The insurer pays the full claim regardless.” It does not. Where the policy contains an average clause and the property is underinsured, the payout is reduced proportionally.

• “Only total losses are affected.” Average applies to partial and total losses alike.

• “My sum insured is the market value of my house.” Market value and rebuild cost are different figures with no fixed relationship. Insuring at market value can leave you underinsured in some areas and overinsured in others.

• “Every policy has an average clause.” Most do, but not all, and the wording varies. Check your own policy documents or ask your insurer or broker to confirm.

If average is raised on your claim

• Ask for the calculation in writing. You are entitled to see the rebuild figure the insurer is using, the source of it, and exactly how the reduction has been worked out.

• Do not accept the reduction on the spot. The insurer’s rebuild assessment is an opinion supported by evidence, not a fixed fact, and early agreement closes the conversation.

• Get your own reinstatement valuation. A professional valuation of the true rebuild cost, measured against the property itself, is the strongest counter-evidence available.

• Take advice before settling. A loss assessor can test what has been included in the insurer’s value at risk, challenge the figure where it is wrong, and negotiate the position where a shortfall is genuine.

How to avoid the average clause

• Review your sum insured at every renewal. Rebuild costs in Ireland have moved sharply in recent years, and a figure set a few years ago may be well behind today’s costs.

• Use the SCSI rebuild guidance. The Society of Chartered Surveyors Ireland publishes an annual guide to house rebuilding costs for insurance purposes, the same reference many adjusters use when checking sums insured.

• Update after renovations. Extensions, attic conversions and significant upgrades all raise the rebuild cost, and the policy should be updated when the work is done, not at the next renewal.

• Get a professional valuation for non-standard homes. Period properties, one-off builds and anything outside the standard guidance should be valued by a suitably qualified professional.

• Consider an index-linked policy. Index linking adjusts the sum insured with building cost inflation, which reduces drift between renewals, though it is not a substitute for getting the starting figure right.

Your rights if average is applied

If your insurer applies average to a claim, you are entitled to see how the reduction was calculated and to challenge it. The insurer’s view of your rebuild cost is an opinion supported by evidence, and it can be tested with better evidence: a professional reinstatement valuation, detailed measurement of the property, and scrutiny of what has been included in the value at risk. Insurers in Ireland are regulated by the Central Bank of Ireland, disputes can be pursued through the insurer’s complaints process, and unresolved cases can be referred to the Financial Services and Pensions Ombudsman. A loss assessor can manage that challenge for you, and in our experience the sufficiency of sums insured is frequently negotiable when the evidence is put properly.

Frequently asked questions

What is the average clause in insurance?
A policy provision that reduces claim payouts in proportion to underinsurance. If you insure your property for less than its full rebuild cost, the insurer pays the same proportion of any claim as the proportion of the risk you insured.

What is the average clause formula?
Settlement Amount = (Sum Insured ÷ Value at Risk) × Value of Loss. The value at risk is the full rebuild cost of the property at the time of the claim.

Does the average clause apply to contents insurance?
It can. Many policies apply a condition of average to contents as well as buildings, so a contents sum insured that understates what you own can reduce contents claims in the same way. Check your policy wording. Carry out an inventory of every room and put a replacement cost on each item.

Does the average clause apply to all home insurance policies?
Most Irish policies include one, but not all, and wordings differ. Always check your own policy documents or confirm with your insurer or broker.

Can the average clause be challenged?
Yes. Both the rebuild cost the insurer has used and the calculation itself can be disputed with supporting evidence such as a professional reinstatement valuation. A loss assessor can prepare and argue that challenge on your behalf.

How often should I update my sum insured?
Review it at every renewal and immediately after any renovation or extension. Building cost inflation means a static sum insured drifts into underinsurance over time.

About OMC Claims

OMC Claims (Owens McCarthy Ltd) is Ireland’s largest independent firm of loss assessors, acting only for policyholders, never for insurers. We provide nationwide coverage, with loss assessors serving Dublin, Cork, Limerick and every other county in Ireland. Part of the Fexco group and regulated by the Central Bank of Ireland (Registration Number C-46734), our team brings over 250 years of combined claims experience and handles more than 2,000 home and business claims a year, from straightforward domestic losses to large and complex commercial claims. We assess the damage, prepare and value your claim, and negotiate with your insurer to work to secure the settlement you are entitled to.

Disclaimer: This content is for general informational purposes only and aims to provide an overview of the average clause in home insurance policies. It does not constitute legal, financial, or insurance advice. For guidance tailored to your specific circumstances, please consult a claims professional or your insurance broker/provider.