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7/10 W01/March 2017 Award in General Insurance

Special condition of average
You will recall that the basis of indemnity for farming stock is its market value, despite the fact that this
includes the policyholder’s profit margin. Insurers also take a more flexible view of the application of
average for farmers and apply the special condition of average to agricultural produce. This is because
the value of agricultural produce fluctuates significantly, particularly around harvest time. The effect of
the clause is to state that if the value at the time of loss represents at least 75% of the actual value,
average will not be applied. The condition does not apply to livestock or implements or utensils of
husbandry. The standard ‘average’ condition applies to such items.
Two conditions of average
These conditions are designed to apply to contents or stock the insurance of which is arranged on a
floating basis (in more than one location), where specific insurance also applies. The effect of the
wording is first of all to state that ‘average’ applies. However, it goes on to state that if there is a more
specific insurance for the items insured at any of the locations, only the excess value will be used to
check whether average applies.
Example 7.5
A policyholder has a fire policy covering stock in warehouses A, B and C for a total value of US$500,000 and
another separate insurance for stock in warehouse B of US$100,000.
A loss occurs and at that time the total value of the stock is US$560,000. When settling the loss under the floating
policy, the figure of US$100,000 is deducted from the total value. This leaves US$460,000, which means that the
sum insured of US$500,000 is adequate and average would not apply.

E4 Excess; deductible

An excess is an amount that is deducted from each claim and is paid by the policyholder. Some
excesses are voluntary, which means that the policyholder receives a premium reduction for agreeing to
carry the excess. They may alternatively be compulsory, such as the excesses that apply to motor
insurance policies in some countries for vehicles owned by young or inexperienced drivers.
Combinations of voluntary and compulsory excesses are possible, and motor insurance provides us with Reference copy for CII Face to Face Training
a good example of this. A policyholder may opt to carry a voluntary excess and in the event of a claim
involving a ‘young’ driver, the voluntary and the compulsory excesses are added together and the total
figure deducted from the own damage claim.
There is a lack of consistency in the market regarding the use of the term deductible. Historically, a
Historically, a
7 deductible was a deductible was a large excess – and this remains one of its definitions today. This would be the case
Chapter to the stated value of the deductible. It works in broadly the same way as an excess for claims that
large excess
where a commercial organisation agrees to meet the cost of any claim falling within the policy terms, up
exceed the deductible amount (the policyholder paying the amount of the deductible and the insurer
paying the balance, subject to any policy limits). However, it is often linked to a risk management
process (see chapter 1, section B) and is a means of retaining risks up to a certain size within an
organisation. The precise way in which it may operate in conjunction with policy limits should be clearly
stated in a policy wording. The variations in the market are beyond the scope of this course.

When a deductible does represent a very large sum, for which the policyholder accepts responsibility
under a material damage or business interruption policy, there tends to be a 72-hour time limit for the
defining of ‘any one event’. This is important when considering weather-related claims that may occur
over a period of time. It means that the deductible applies only once in such circumstances.
The two terms ‘excess’ and ‘deductible’ sometimes appear to be used interchangeably in the market,
which can be confusing. This blurring of boundaries has been influenced by the fact that in parts of the
world, most notably in the USA, the term ‘deductible’ is used to describe modest sums for which an
individual policyholder is responsible under motor or other forms of private insurance policies (what we
have just defined as an ‘excess’).

In general, policies that contain an excess will pay up to the policy limit over and above the excess.
However, where the policy refers to a deductible, this amount is deducted from the limits. Even this
usage is not universal, but it serves to distinguish the terms as a general rule before reference to the
policy wording for clarity.
If there is underinsurance or any other policy term that limits or reduces a loss, and an excess or
deductible applies to the same loss, the excess or deductible is deducted last of all.