The principle of average and the application of fairness in claims handling

The principle of average and the application of fairness in claims handling

The insurer’s duty of disclosure (the policyholder’s right to information) is regulated under the Policyholder Protection Rules (PPRs) and the General Code of Conduct (GCC) of the FAIS Act
37 of 2002.

The PPRs and the GCC require direct insurers and intermediaries to inform the insured, before the inception of the policy, of precise details of any special terms, conditions and restrictions or circumstances where benefits will not be provided. The application of average limits the extent to which an insurer will accept liability. Since it relates to a policy limitation the insured ought to have been advised of average when the policy was underwritten.

An average clause in insurance is a provision that can affect the claim settlement amount the insured receives for a partial loss or damage to insured property. If the insured item is underinsured, meaning that the sum insured is less than the actual value of the property, the average clause may apply.

Both the National Financial Ombuds Scheme South Africa (NFOSA) and FAIS Ombuds agree that the principle of average in insurance contracts is an example of a circumstance where the policyholder’s benefits will be affected.

Where an insurer or intermediary fails to demonstrate that the insured was informed, before the inception of the policy, of an average clause in a policy contract, and also the implication of being under-insured, the insurer will not be allowed to apply average. This approach is in line with the fairness mandate of the two offices of the Ombuds, and the requirement of fair conduct as reflected in the PPRs.


Considering the above discussion, it is evident that merely relying on the average clause outlined in the policy wording or schedule is no longer satisfactory for insurers or intermediaries. There is a pressing need to demonstrate that the insured has been adequately informed about the implications of the average clause, allowing them to make informed decisions when entering the insurance contract. Proper record-keeping practices must be maintained to serve as conclusive evidence that the average clause was thoroughly explained to the insured at the inception of the contract.

The PPR’s and FAIS General Code of Conduct apply to both Personal and Commercial Lines products.