Legal head: insurance
Subject matter: "condition of average"
Sub-subject: effect of calculation on insurers ability
Principle:
Where an insurance policy is subject to the "condition on average" the liability of the insurer is calculated by dividing the sum insured by the value of the property at the time of the loss occasioned to the insured property.
Quotes:
The condition on average" to which reference is made to above of the insurance policy is known as the "first condition of average". In macgillivray on insurance already mentioned before on this blog, it is stated that;
"Average clause: The average clause usually contains what is known as the two conditions of Average. The pro rata average (contribution). The two pro rata average is designed to prevent the assured obtaining an undue benefit from under insurance. It provides that where the value of the subject matter of insurance exceeds the amount insured, the assured shall be his own insurer for the difference and that the office and the assured shall share all losses total and partial in the same proportion that the sum assured bears to the value of the property. As a rule, the pro rata average condition is inserted only in policies insuring commercial risks. It is seldom found in insurance upon private house property"
"Pro rata condition of average: the following is an example of a modern pro rata average condition;
• Whenever a sum insured is declared to the sum in average, if the property covered thereby shall, at the breaking out of any such sum insured, then the assured shall be considered as being his own insurer for the difference and shall bear a rateable share of the loss accordingly."
Where a lloyd's policy was expressed to be "subject to average" it was held that it was subject to the above condition but was not subject to the second condition of average.
"The pro rata condition of average when inserted in a policy is usually called the "first condition of average" in contra distinction to the "second condition of average" which is not an average condition but rather a contribution clause. One of the earliest cases in which the pro rata condition of average, also known as "the first condition of average" was applied and which we think is pertinent to the circumstances."
In the book "fire insurance and practice" fourth edition by TR Smith and H R Francis which the learned counsel to the appellant brought to our notice and which has been of most assistance to us, we found a given formula for working out the liability of an insurer in cases of insurance subject to the average condition. The formula is set out by the learned authors as follows; the operation of the condition can be shown by an example
Sum insured = N1,500
Loss = 300
Value of property at = N1800
The time of the fire
The insurers liability = sum insured X loss value.
From the foregoing formula, liability under a policy of insurance subject to average conditions may in general terms be expressed as a fraction thus;
Ration of liability = sum insured (value of property at the time of the cause of the loss insured against)
The amount payable = sum insured X loss value of the property at the time of the cause of the loss insured against.
"It must not be assumed that the insurers cannot be called upon to pay the full sum insured. If the property is totally destroyed there will be a total loss under the policy of insurance"
Justice: Udoma JSC
Case: Royal Exchange Assurance VS Oghene SC 18/1968 on the 17th of December, 1971.
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