Understanding the Condition of Average (Underinsurance Clause) in Malaysia
The Condition of Average is the most frequent cause of disputed and reduced commercial property payouts in Malaysia. When a business insures a building, factory plant, or warehouse stock for a figure lower than its true replacement cost, the insurer treats the policyholder as a co-insurer for the uninsured percentage—even on partial losses.
The Average Clause calculation formula
Insurers apply this formula during loss adjustment:
Payout = Loss Amount × (Sum Insured ÷ True Value at Time of Loss)
Worked corporate claim example
Suppose a manufacturing plant has a true machinery reinstatement cost of RM 4,000,000, but management leaves the policy sum insured at historical book value of RM 2,000,000 (50% underinsured). A localized fire causes RM 600,000 in partial damage.
Instead of paying RM 600,000 (which is well below the RM 2,000,000 policy limit), the loss adjuster applies the 50% ratio and settles the claim at RM 300,000, leaving the company to absorb RM 300,000 out of working capital.
Coverage & Technical Matrix
| Coverage Component / Parameter | Status / Basis | Underwriting Notes |
|---|---|---|
| Building Structure Valuation | Gross Floor Area × Current Construction Cost per sq ft | Include professional fees and debris removal |
| Plant & Machinery Valuation | New Replacement Cost + Freight + Installation | Account for foreign exchange changes on imported machinery |
| Stock-in-Trade Valuation | Peak Seasonal Raw Material & Finished Goods Cost | Consider Stock Declaration policies for fluctuating inventory |
| Inflation Protection | Annual pre-renewal review | Adjust sums insured for construction and supply chain inflation |
Standard Policy Exclusions
- Relying on accounting Net Book Value (depreciated value) to set insurance limits
- Omitting customs duties, shipping freight, and commissioning labor for imported plant
- Failing to update sums insured after warehouse extensions or mezzanine installations
- Ignoring debris removal and municipal compliance costs after a structural fire
Underwriting & Quotation Requirements
- Latest fixed asset register with original purchase dates and currencies
- Contractor renovation invoices and mechanical/electrical fit-out schedules
- Peak monthly inventory valuation reports from the past 12 months
- Professional valuation report (if available for industrial real estate)
Frequently Asked Technical Questions
Does the Average Clause apply if my claim is smaller than my Sum Insured?
Yes. The Average Clause applies to every partial loss whenever the total value at risk exceeds the declared Sum Insured at the moment of the incident.
How can a warehouse with fluctuating inventory avoid underinsurance without overpaying?
Use a Stock Declaration clause. You insure at your maximum projected stock peak, pay a provisional 75% deposit premium, and submit monthly stock declarations so the final annual premium is adjusted against your actual average inventory.
Key Underwriting Clauses Defined
Reinstatement Value Clause
A property insurance basis that pays the full cost of replacing damaged buildings or machinery with new items of the same kind and capacity, without deducting for depreciation.