Registered Insurance Brokers of Ontario (RIBO) Practice Exam

Is the statement "The full average clause allows an insured to underinsure using an average ACV settlement for the type of property" true or false?

1. True

2. False

3. Depends on the insurer

4. Only true for commercial property

The correct answer is: False

The statement is false because the full average clause does not permit the insured to underinsure their property. Instead, the full average clause operates on the principle that if property is underinsured at the time of loss, the insurer will apply a penalty that proportionally reduces the claim payout based on the level of underinsurance. This means that if the insured value is less than what is required to fully cover the property at its replacement cost, the settlement will be adjusted downward. In essence, this clause incentivizes policyholders to insure their property for its full value to avoid any potential financial loss at the time of a claim. The average clause generally aims to ensure that insureds maintain an adequate level of coverage, discouraging insufficient insurance practices that can lead to financial hardship during claims situations.