Ask most people what happens if they insure a building for less than it is worth, and they will tell you the insurer simply pays up to that limit. It is a reasonable assumption. It is also wrong, and the difference costs Nigerian businesses a great deal of money every year.
How the average clause works
If you insure something for less than its true value, the insurer treats you as having carried part of the risk yourself — and reduces every claim by that same proportion. Not just total losses. Every claim.
That last point is what surprises people. The claim was nowhere near the ₦50m limit, so it feels like it should have been paid in full. The average clause does not work that way.
Why it happens to careful people
- Sums insured are set once and then rolled over at each renewal without review
- Rebuild cost is confused with market value — they are different numbers, and for a building the rebuild figure is often higher
- Business growth outpaces the policy: more stock, more equipment, another floor
- For business interruption, the insurance definition of gross profit is not the one in your accounts, and using the accounting figure under-insures you
What to do about it
- 1Get a proper reinstatement valuation for buildings, rather than estimating
- 2Review sums insured at every renewal, not every few years
- 3Take an inventory of equipment and stock at least annually
- 4For business interruption, have the gross profit figure calculated on the insurance definition
- 5Ask your broker directly: if I claimed today, would average apply?
That last question is the fastest diagnostic there is. Any broker should be able to answer it immediately, and if they cannot, that itself tells you something.
Still your situation?
General guidance only takes you so far.
This article cannot know your circumstances. A free consultation can — bring your questions, your current policy, or nothing at all.