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02 December 2020 | 3-minute read
Asset values have always been central to insurance and are key in determining the insurability, pricing and retention levels of a (physical) risk. Underwriters have over the years developed various tools and indexes to benchmark values, as a means to assess their accuracy, but the more complicated the assets under review are, the more difficult it becomes to link them to an index.
A tool traditionally utilised by underwriters, when values are deemed inadequate, is the average clause, which links the level of underinsurance to the indemnity by subjecting indemnity to the same ratio that the reported values bear to the determined values at the time of the loss. This clause is often perceived as punitive by the Insured especially when this forms a permanent fixture on the policy wording.
The LMA’s Onshore Energy Business Panel recently revisited the average clause with the purpose of clarifying the methodology followed. It was initially brought up following numerous occasions of undervaluation being discovered post valuations or post actual losses. During this process we identified that the main purpose for introducing such a clause on a policy, is to encourage the Insured to undertake a valuation and not to penalise them. As a result, the new model clause was named Property Damage Valuation and Average Clause and the emphasis is now clearly put on the valuation.
Insurance is based on trust and good faith and being able to trust asset values is part of this. Values change over time and while accounting methods and industry indexes can help keep them updated for short periods, periodic valuations are required for the more complicated risks and this clause is a reminder that up-to-date valuations are required.
The clause requires that a mutually acceptable independent valuation must be conducted and that the scope of the valuation needs to be agreed by the underwriters. The clause also allows the underwriters to list valuation companies that they deem acceptable where this is thought to facilitate the Insured.
The clause is expected to be used only where values are deemed inadequate by the underwriters and the average clause to apply only to the locations for which an acceptable valuation is not in place (ref. paragraph b). The way to monitor this is at the Insured’s and underwriter’s discretion. NB When the valuation exercise is completed, the clause can be removed from the policy.
The Average provision features at the bottom of the clause and the methodology described in it is on a per location basis. While it was identified that the ”per location” basis will not work for all risks (e.g. some declare the values per system), this basis was deemed the most fitting for the purposes of a model clause. A loss adjuster and a valuation expert were consulted when considering how to value an asset post loss, especially in relation to partial losses.
The task of achieving value accuracy is certainly not over and while all the aforementioned tools are available to help assess property values, the equivalent undertaking for Business Interruption (BI) values is far more complicated. The OEBP has published a suite of BI Volatility clauses in the past to address this problem and another version is due to be published in late 2020. However, partial losses remain a challenge and there is further work underway to try and address this.
The LMA’s model clause LMA5514 was published in November and is available on the Lloyd’s Wordings Repository (LWR).