What do you understand by condition of 'average' in a fire insurance contract? How does this operate? Explain.

The doctrine of average - or average clause is always applied in indemnity policies- primarily in property claims - fire and engineering. At the time of taking the policy the insured has to consider the value of the risk or subject matter of insurance-sum insured. He must ensure that the adequate value has been declared and insured. If, at the time of loss, it is found that the sum insured is less than the actual value of the subject matter, then the proportionate or ratable portion of the claims would be payable. The insured would therefore be his own insurer for the difference. Insurance Contracts are strictly Contracts of indemnity. On the happening of an Insured event- Fire, the Insurer pays for the sum Insured or Market Value of the property whichever is less. Thus if the sum insured of a property is ₹30 Lacs and the Market Value of the same on the day of Fire was ₹35 lacs and if the property was damaged by fire to the extent of ₹28 lacs, than the liability of the Insurance Company would be = Sum Insured / Market Value x Loss i.e., = 3000000/3500000*2800000 = ₹24 Lacs The owner of the property would be liable for the remaining ₹4 lacs and would be considered to be its own Insurer for the balance.