Registered Insurance Brokers of Ontario (RIBO) Practice Exam

What impact does the average clause have on underinsurance?

1. Encourages full coverage

2. Allows for greater payouts

3. Mitigates penalties for underinsuring

4. Can lead to reduced claims settlements

The correct answer is: Can lead to reduced claims settlements

The average clause in insurance is a provision that applies in cases of underinsurance, where the insured value of the property is less than its actual value. When this clause is invoked, it typically reduces the amount an insurer will pay out in the event of a claim based on the proportion of coverage in relation to the actual value of the insured item. When an average clause is in effect, it can lead to reduced claims settlements. If a property is insured for less than its market value and a claim is made, the insurer calculates the payout based on the percentage of coverage purchased versus the actual value. For instance, if a property is worth $100,000 but only insured for $50,000, the insurer may only pay out 50% of the claim amount, thereby reducing the settlement. This discourages insufficient coverage and encourages policyholders to accurately assess and insure their property to avoid financial losses in the event of a claim. The other options suggest outcomes that do not align with the aim of the average clause. Encouraging full coverage and allowing for greater payouts do not reflect the typical purpose of the average clause, which is more about penalizing underinsurance rather than encouraging sufficient coverage. Additionally, mitigating penalties for underinsuring contradicts the very principle