Proximate cause and the Average clause: Under and over insuring

• This prevents the insured from making a profit by:

1) Under-insuring a risk or paying less premiums.

• When a loss is incurred under such circumstances the insurer will not indemnify the insured.
• The insured will just pay the proportion of the amount for which the property was insured and the insured will incur the remaining loss.
• For example the insured has a house worth $200 000 but takes out an insurance policy for the value of $100 000 against risk of loss resulting from a fire.
• If the house later suffers from fire damage with the estimated cost of property destroyed by the fire being $50 000.
• The amount payable by the insurer will be:
• false value/actual value x loss or damage
• 100 000/200 000 x50 000
• $25 000
• The insured will have to finance the other portion.

2) Over insuring-

• One cannot claim more than the actual loss suffered.
• One is restored to former position in accordance with the indemnity principle.
• One must not be able to make a profit out of insurance save for insurance companies.
• For example if a person has a house worth $90 000 and takes out an insurance policy for $150 000 the person will only receive $90 000 (the full value of the house) and not $150 000.

3) Proximate clause

• Payment is only paid out if the cause is immediate.
• Or if the loss occurred as a result of the insured risk.
• For example if a household appliance fore example Television is insured against damage by fire, the owner will not receive any compensation from the insurance company if it is stolen.

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