IAJ presses homeowners to update insured values amid Melissa average-clause cuts

Property owners should confirm that their home and business policies match current replacement costs, the Insurance Association of Jamaica (IAJ) is advising, after the average clause — a longstanding insurance rule many clients barely grasp — kept trimming Hurricane Melissa settlements for those who were underinsured.

“The IAJ recognises that many policyholders do not fully appreciate the effect of underinsurance until they suffer a major loss,” the association said in a written reply to the Financial Gleaner. “This is where the industry, brokers, valuers and policyholders all have lessons to learn.”

Under the average clause, an insurer scales down a claim by the same share that the property is short of full cover. A building insured at 70 per cent of true replacement cost can therefore draw only 70 per cent of an otherwise payable claim, including where damage is only partial, before any deductible is taken off.

The IAJ said it issues print reminders about the provision at least every quarter, yet conceded that large numbers of policyholders still learn how it works only after a loss has struck. It backed the Financial Services Commission’s (FSC) sharper supervisory focus on the issue and said the sector’s aim is “aligned with the regulator’s: valid claims should be assessed and settled as quickly, fairly and transparently as possible”.

Those remarks answer the FSC’s confirmation that it has opened a targeted look at how carriers are using the clause on Melissa underinsurance files — a probe this newspaper first covered on July 9.

“The average clause is not new, nor is it intended to be punitive,” the association said. “It is a standard insurance principle that applies where the sum insured is materially below the actual replacement or reinstatement value of the property. In those circumstances, the policyholder is treated as having retained part of the risk, and the claim payment may be reduced proportionately.”

Scrutiny of the clause is unfolding against a broader settlement pile-up. Melissa triggered “an extraordinary concentration of property claims”, the IAJ said, stretching insurers, loss adjusters and brokers. It accepted that some files — especially bigger, more intricate property and business-interruption matters — have moved more slowly than clients hoped.

On island-wide payout tallies, the association said the numbers still sit with each insurer and are being filed with the FSC under supervision, so the IAJ does not yet have a consolidated Melissa settlement rate. It offered no timetable for releasing an industry total, stating only that it “would not wish to release partial or unverified figures that could mislead the public”.