The Average Clause: How Underinsuring Your Office Contents Cuts Every Claim
"The Insured shall be considered as being his own Insurer for the difference, and shall bear a rateable proportion of the loss accordingly." That sentence sits in Condition 20 of the standard Malaysian fire policy, and it is the reason a RM40,000 claim can settle at RM24,000 on a policy that is fully in force and fully paid.
The average clause does not wait for a total loss. It applies to every claim you make, and the smaller ones are where it does the most damage, because nobody expects it.
This article is about office contents: the equipment, fit-out, furniture and servers inside a leased office or shop unit. Buildings, factories and industrial plant follow different valuation rules and are a separate conversation.
Not sure what your contents sum insured is set at?
It is on your policy schedule, usually as a single figure under contents or office equipment. If it has not moved since you signed the lease, it is worth a look before renewal. We can review what you have against what you would actually need to replace, alongside your office fire insurance.
Key Facts: The Average Clause on Office Contents
What is the average clause? It is a policy condition that reduces your claim in proportion to how far your sum insured falls below the true replacement value of the insured property. Insure 60% of the value and you recover roughly 60% of the loss.
Who does it catch? Businesses whose contents figure was set once and never revised, which is most offices that have added staff, laptops, servers or fit-out since the policy started. The clause applies per item on the schedule, so one under-stated item is not rescued by another that is over-stated.
What drives the sum insured you should carry? The cost to replace the contents new today: workstations and laptops, monitors, servers and networking equipment, furniture, and any fit-out or renovation you paid for. Book value after depreciation is the wrong number and it is the most common error.
Is the average clause required in Malaysia? No statute imposes it. It is a contractual condition inside the policy wording, and it appears in the standard Malaysian fire policy as Condition 20. You cannot opt out of it, but you can make it harmless by carrying an accurate sum insured.
What catches people out most? Believing the clause only matters for a total loss. It applies to partial losses too, and partial losses are the overwhelming majority of office claims.
Last verified: August 2026. Condition 20 and the reinstatement value provisions were checked against two Malaysian fire policy wordings published by insurers in the Malaysian market.
What Condition 20 actually says
The wording is old, short, and unambiguous. Two separate Malaysian insurers publish it in near-identical terms, which tells you it is market-standard drafting rather than one company's invention.
"If the property hereby insured shall, at the breaking out of any fire, be collectively of greater value than the sum insured thereon, then the Insured shall be considered as being his own Insurer for the difference, and shall bear a rateable proportion of the loss accordingly. Every item, if more than one, of the Policy shall be separately subject to this Condition."
Condition 20, Fire Policy wording, QBE Insurance (Malaysia) Berhad. The same condition appears at the same number in Zurich General Insurance Malaysia Berhad's fire policy wording.
Read the last sentence twice. "Every item, if more than one, of the Policy shall be separately subject to this Condition" means the test runs item by item. If your schedule splits contents from fit-out, each is tested on its own, and getting one right does not cover for getting the other wrong.
The arithmetic, on numbers an office would recognise
The formula is straightforward: your claim is multiplied by the sum insured divided by the true replacement value. The table below shows the same RM50,000 water damage loss under four different levels of underinsurance, holding everything else constant.
| True replacement value | Sum insured | Loss | Settlement before excess | You absorb |
|---|---|---|---|---|
| RM400,000 | RM400,000 | RM50,000 | RM50,000 | Nil |
| RM400,000 | RM300,000 | RM50,000 | RM37,500 | RM12,500 |
| RM400,000 | RM240,000 | RM50,000 | RM30,000 | RM20,000 |
| RM400,000 | RM160,000 | RM50,000 | RM20,000 | RM30,000 |
Notice what is not happening here. The insurer is not disputing the claim, not alleging non-disclosure, and not applying an exclusion. The policy is responding exactly as written. The shortfall is arithmetic.
Notice also that the excess comes off afterwards. On the third row, a RM2,500 excess turns a RM50,000 loss into RM27,500 recovered, and the business funds RM22,500 of a loss it believed was fully insured.
Why office sums insured drift out of date faster than anyone expects
Offices are the worst case for this, and it is not carelessness. It is that office contents grow in small increments that never feel like a reason to ring your insurer.
| What changed | Why the sum insured did not follow |
|---|---|
| Headcount went from 12 to 30 | Laptops and desks were bought one or two at a time out of opex, never as a single event worth reporting |
| You fitted out the unit | Renovation is often treated as the landlord's asset in the tenant's head, when the tenant paid for it and would pay again |
| You added a server rack or network hardware | IT spend sits in a different budget line from the insurance renewal, and the two conversations never meet |
| The figure came from the accounts | Net book value after depreciation is far below replacement cost, and it is the number most readily to hand |
| Equipment prices rose | The same specification laptop costs more than it did three years ago, so a static sum insured buys less every year |
That fourth row is worth isolating, because it is the single most common source of the gap. Depreciated book value answers an accounting question. The policy asks a different one: what would it cost to put you back where you were.
Reinstatement value: the clause that changes the test
Where a reinstatement value clause applies, the policy pays the cost of replacing property new rather than its depreciated value, and the average test is then run against that replacement cost. This is better cover, and it raises the number you need to carry.
One Malaysian wording puts it plainly:
"If at the time of replacement or reinstatement the sum representing the cost which would have been incurred in replacement or reinstatement if the whole of the property covered has been destroyed exceeds the sum insured thereon at the breaking out of any fire... then the Insured shall be considered as being his own insurer for the excess and shall bear a rateable proportion of the loss accordingly."
Reinstatement Value Clause FC816, Zurich General Insurance Malaysia Berhad fire policy wording. A materially identical provision appears in QBE's wording.
Some reinstatement clauses soften the test with a percentage margin. Zurich's strata-titled property version, FC816A, applies average only where the sum insured is below 85% of full replacement cost, which gives a tolerance band. Whether any such margin sits in your policy is a question about your own schedule and endorsements, not something to assume from an article.
Renewal coming up in the next quarter?
Renewal is the cheapest moment to reset the figure, because adjusting the sum insured mid-term means a pro-rata premium and a conversation. We can look at your schedule alongside your SME business insurance and tell you where the gap is.
How to rebuild the number in about an hour
You do not need a professional valuation for office contents. You need a list and current prices, built in this order.
| Step | Action | Where the number comes from |
|---|---|---|
| 1 | Count workstations and multiply by the cost of a current equivalent laptop, monitor, desk and chair | Your most recent purchase order, not the one from when you moved in |
| 2 | Add servers, switches, NAS, UPS and networking hardware at replacement cost new | Your IT lead, who usually knows this within minutes |
| 3 | Add the fit-out you paid for: partitions, carpentry, flooring, lighting, air-conditioning you installed | The renovation invoice, uplifted for the years since |
| 4 | Add everything easy to forget: printers, phones, projectors, pantry equipment, tools, stock of any kind | Walk the floor once with the list open |
| 5 | Compare the total against the schedule, and reset at renewal if they differ materially | Your policy schedule |
Repeat it annually, or after any move, fit-out or hiring wave. The exercise is cheap and it is the only thing that makes the average clause irrelevant to you.
Where this sits against your other cover
Underinsurance on contents is a property problem, and it does not travel to your liability policies. Professional indemnity, public liability and cyber carry limits of indemnity rather than sums insured, and average does not apply to them in the same way. The mechanics that decide whether a liability limit is worth what your contract thinks it is are a different set of questions, covered in our writing on what business insurance covers.
Two boundaries worth naming. If you occupy a leased unit, the building structure is the owner's to insure and their policy is not yours, which is set out in our piece on co-working and shared office insurance. And if your premises are a factory, warehouse or industrial plant, the valuation basis is genuinely different and you should be talking to a property and engineering specialist rather than reading an office article.
The context for why this matters at scale: MSMEs contributed RM689.8 billion in value added in 2025, 39.7% of national GDP, growing 5.7% against overall GDP growth of 5.2%, according to the Department of Statistics Malaysia in its release of 30 July 2026. Fast-growing businesses accumulate assets faster than they update paperwork, and that is precisely the gap this clause punishes.
FAQ
Does the average clause apply if my loss is small?
Yes. The clause is proportional and applies to partial losses, which are the majority of office claims. A business insured at 60% of true value recovers roughly 60% of a RM20,000 loss just as it would on a RM200,000 one. Small claims are where most people meet the clause for the first time.
What sum insured should I use for a three-year-old laptop?
The cost of buying a current equivalent new, not what the laptop is worth today and not its depreciated book value. Where a reinstatement value clause applies, replacement cost new is the basis the policy itself uses. Using accounting book value is the most common cause of underinsurance in offices.
Is there a tolerance before the average clause bites?
It depends on your wording. The base Condition 20 has no margin at all and applies from the first ringgit of shortfall. Some reinstatement value clauses include a percentage threshold, such as the 85% margin in one Malaysian insurer's strata-titled property clause. Check your own schedule and endorsements rather than assuming a margin exists.
Can I remove the average clause from my policy?
Not as a rule. It is a standard condition of the Malaysian fire policy and it is what keeps premiums aligned to the risk actually carried. The practical answer is not to remove it but to carry an accurate sum insured, which makes it harmless.
Does average apply separately to each item on my schedule?
Yes, where the schedule lists more than one item. Condition 20 states that every item is separately subject to the condition. Over-insuring your furniture does not compensate for under-insuring your servers, because the two are tested independently.
My landlord insures the building. Does that cover my office contents?
No. The owner's policy covers the owner's building and the owner's interest in it. Your equipment, fit-out and stock sit on your own policy or nowhere, and the sum insured for them is yours to set correctly.
What happens if I under-insure and then have a total loss?
You recover the sum insured, which is the policy maximum, and you fund the rest yourself. On a total loss the shortfall is simply the difference between the sum insured and what replacement actually costs. The proportional reduction on partial losses often surprises people more, but a total loss is where the absolute number hurts most.
Contingent Conclusion
The average clause is not a trap and it is not fine print designed to catch you. It is the mechanism that keeps the premium honest, and it does exactly what it says as soon as the sum insured stops matching reality.
What that means for your business is narrow and actionable: the figure on your schedule is a live number, not a form field you completed once. If headcount, hardware or fit-out has moved since you set it, every claim you make between now and the day you fix it settles at a discount you have not agreed to.
Contingent helps Malaysian businesses get the cover their contracts and landlords require. Whether you're comparing options or checking whether your existing policy actually does what the contract asks, we can help.
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Related reading: office fire insurance, office insurance coverage for business premises and tenants, what fire insurance covers in Malaysia, burglary and theft cover for business assets, co-working and shared office insurance, what business insurance covers, and SME business insurance.
Primary sources: the QBE Insurance (Malaysia) Berhad Fire Policy wording and the Zurich General Insurance Malaysia Berhad Fire Insurance Policy wording for Condition 20 and the reinstatement value clauses, and the Department of Statistics Malaysia for MSME performance figures.
Published by Contingent, the commercial insurance brand of Emerge Insurtech (Malaysia) Sdn. Bhd.
Disclaimer: This article describes how these policy terms commonly operate in the Malaysian market as of August 2026, with clause references drawn from wordings currently in use. Wordings differ between insurers and between policy years, and endorsements can delete or amend any clause described here. Always read your own schedule and endorsement pages, and consult a qualified insurance professional before relying on any of it.
