Application of Average Clause


The insured vehicle was damaged due to an accident and the insured submitted an ‘Own Damage’ claim to the insurer for the cost of repair.  The insurer approved the claim and made an offer for the cost of repair subject to an average clause in the policy since the vehicle was underinsured. The insured was, however dissatisfied with the insurer’s decision to apply the average clause in the approval of the cost of repairs to the insured vehicle.


Investigation and Findings

The insurer contended that the market value of the insured vehicle at the material time of loss was RM45, 500.00 whereas it was only insured for the sum of RM40, 000.00. Thus, the insurer had applied the average clause in their assessment of the cost of repair in accordance to policy Condition 2 (c) which states:

2.  Basis of Settlement

(c ) If your vehicle shall at the time of happening of any loss or damage be insured for a sum lesser than its market value then, You shall be considered as being Your own Insurer for the difference and shall bear the rateable proportion of the loss accordingly. Provided always that this shall not apply unless the market value at the time of the loss exceeds the insured value by 10% or more;

The Case Manager observed that the insured had contended that he had insured the vehicle as per the sum insured recommended by the agent. Upon the Case Manager’s request, the insurer had obtained the agent’s clarification on the matter. The agent did not dispute the insured’s contention  and clarified that  the sum insured  was recommended by the hire purchase company.

 In the circumstances, the Case Manager opined that the average clause should not be applicable and  referred to the Bank Negara Malaysia’s Guideline on Market Value of Motor Vehicles which states as follows:

BNM/RH/CIR 010-9

Consumer and Market

Conduct Department

Market Value of Motor Vehicles




5.1  Insurers/ takaful operators and  their  agents  are required to advise consumers during the pre-contractual stage or renewal of motor insurance / takaful cover of the following:-

·  the  present market value of the motor vehicle;

·  the importance of insuring the vehicle at the appropriate market value; and

·  the effect of over-insurance and under-insurance when a claim is made.

5.2  Advice to consumers on the present market value  must be based on the ISM Automobile Business Intelligence System (ISM-ABI system)  or any other credible vehicle valuation database.  The present market value should be indicated in the renewal notice or product disclosure sheet.

5.3  To ensure consistency in the market value of an insured  vehicle at the point of insurance and subsequent claim, the insurer / takaful operator should use the same  reference  database  to determine the market value of the vehicle in both instances.

5.4  The present market value should be provided to consumers without any additional charge to consumers.

5.5  If the consumer  agrees to insure at the value recommended by the insurer / takaful operator, average clause will not be applicable in the event of partial loss claim.



The insurer agreed to waive the application of the average clause and made a revised offer for the cost of repair which was duly accepted by the insured.