Which concept applies when a partial loss occurs and the risk is under-insured, leading to partial loss?

Which concept applies when a partial loss occurs and the risk is under-insured, leading to partial loss?

• A. Factoring
• B. Tax credits
• C. Budget
• D. Average clause

Answer: (D)

Partial loss situations under under-insurance are governed by the average clause. This clause means you only receive a payout proportional to the level of cover you bought relative to the actual value of the risk. For example, if a property is worth 100,000 but only insured for 60,000, and a loss of 40,000 occurs, the insurer will pay 60% of the claim (40,000 × 60,000 / 100,000 = 24,000). You would bear the remaining 16,000 yourself. This mechanism encourages accurate valuation and full insurance. The other terms relate to different concepts: factoring is about selling receivables, tax credits are tax reliefs, and a budget is a plan of income and expenditure, none of which explain how payouts are adjusted when under-insured.

Partial loss situations under under-insurance are governed by the average clause. This clause means you only receive a payout proportional to the level of cover you bought relative to the actual value of the risk. For example, if a property is worth 100,000 but only insured for 60,000, and a loss of 40,000 occurs, the insurer will pay 60% of the claim (40,000 × 60,000 / 100,000 = 24,000). You would bear the remaining 16,000 yourself. This mechanism encourages accurate valuation and full insurance. The other terms relate to different concepts: factoring is about selling receivables, tax credits are tax reliefs, and a budget is a plan of income and expenditure, none of which explain how payouts are adjusted when under-insured.