The aim of insurance is to put the insured back into the same position that he was in prior to the loss. It is not for gain or profit. This is called indemnity.

In order for the insured to be indemnified fully the full value of his property must be insured.

The insured must pay his fair share into the insurance pool or fund.





If the insured does not advise the insurer of the correct value at risk e.g. lower the value, he will not be paying adequate premiums into the pool and as such he should not expect to be fully compensated. When this happens the insurer will apply what is called average clause.

For example

The present value of your house is R200 000
You insurer it for R100 000
It is damaged by fire to the tune of R10 000
Would it be fair to pay you the full R10 000? No
You have paid premiums on R100 0000 sum insured and therefore not paid your fair share into the pool.
To work indemnity we apply the formula for average which is

Sum insured
__________ X Loss = Settlement

Value at Risk


In our example

R100 000

_________ X R10 000 = R5 000

R200 000

You will there receive R5 000 from the insurer.

When the average is applied the insured is considered his own insurer for the balance.

It was stated earlier that the insurance is not for gain or profit. By the same token if the client is over insured he will be paid up to the correct value of the loss not more.