Underinsurance and the Average Clause: Why Your Payout Can Be Cut
If your car's sum insured is too low compared with its market value, your insurer may reduce your claim payout under the average clause. The private car policy wordings we checked apply this clause when the sum insured is more than 10% below the car's market value at the time of loss.
- Last reviewed:
- Reviewed by:
- Compliance
- Underinsurance: Your sum insured is lower than your car's market value.
- Average clause: Reduces your claim payout in proportion to the shortfall.
- 10% threshold: Applies when the shortfall exceeds 10% of market value under the policy wordings checked.
- Repair and total-loss claims: Both can be affected.
How does the average clause work?
The average clause calculates how much the insurer pays when your car is underinsured.
Formula
Insurer's payout = (Sum insured ÷ Market value) × Assessed loss
For example, if your car is worth RM60,000 but insured for RM45,000, the shortfall is 25%. If your repair claim is RM10,000, the insurer pays RM7,500. You bear the remaining RM2,500.
The calculation uses your car's market value at the time of loss, not its original purchase price.
For more information, read our guide to sum insured.
How much can underinsurance affect your payout?
The following examples use hypothetical figures and exclude excess, betterment and other policy deductions.
| Scenario | Market value | Sum insured | Assessed loss | Insurer pays |
|---|---|---|---|---|
| Within 10% threshold | RM60,000 | RM56,000 | RM10,000 | RM10,000 |
| Underinsured repair | RM60,000 | RM45,000 | RM10,000 | RM7,500 |
| Underinsured total loss | RM60,000 | RM45,000 | RM60,000 | RM45,000 |
What this means:
- If the shortfall is below 10%, the average clause does not apply under the wordings checked.
- If the shortfall exceeds 10%, your repair payout may be reduced.
- For a total loss, the payout is subject to the applicable settlement terms and may be lower than your car's market value.
In the last example, the RM15,000 difference is the uninsured portion of your car's value, not an additional bill payable to the insurer.
Market value vs agreed value
The settlement basis depends on your policy.
| Market value | Agreed value |
|---|---|
| Settlement considers the car's market value at the time of loss. | The agreed amount is used for theft or total destruction under the agreed value endorsement we checked. |
| Underinsurance may reduce your payout if the policy's threshold is exceeded. | The market value at the time of loss is not used for those specified claims. |
Agreed value does not automatically apply to partial repair claims. Check your policy for the applicable conditions.
Read more about market value vs agreed value.
How to avoid underinsurance
Check your sum insured at renewal
Compare it with your car's current market value.
Understand your car's valuation
Insurers may use the ISM Automotive Business Intelligence (ABI) database as a valuation benchmark.
Read your policy wording
Check the under-insurance clause and your sum insured.
Avoid over-insuring
A higher sum insured does not guarantee a higher payout under a market value policy.
You can also compare car insurance on BJAK to review available coverage and sum insured options.
Frequently asked questions
Not necessarily. The AIG, RHB and Liberty policy wordings we checked use the same basic formula and 10% threshold. Other insurers and takaful operators may have different terms.
No. The under-insurance clause applies to damage to your own insured car under Section A, not third-party liability claims under Section B. Other policy terms and liability limits still apply.
Ask your insurer. Changes are generally made through a policy endorsement, and additional premiums or contributions may apply.
This may be subject to insurer approval. However, a higher sum insured does not guarantee a higher payout under a market value policy.
Check your sum insured before renewing
Choosing the right sum insured helps reduce the risk of receiving a lower claim payout because of underinsurance. Check your car's market value and compare available coverage before renewing.