A farmer loses a building containing livestock feed during a lightning strike. The loss adjuster says the livestock feed is insured for only 80% of market value. This is an example of the application of the

The situation described represents the principle of average, specifically a special condition of average. This principle is applied in insurance when the insured property is not fully insured relative to its market value at the time of loss. In this case, the livestock feed is insured for only 80% of its market value, indicating that if a total loss occurs, the insurer will only pay 80% of the amount necessary to replace the feed.

The principle of average operates to discourage underinsurance, which can lead to moral hazard where the insured might be less careful with their property. By insuring only a portion of the value, the farmer faces a reduction in the payout to reflect the actual level of coverage taken out. This principle ensures that insurance remains effective for the amount insured and prompts the insured to consider the full value of their assets when purchasing coverage.

In this instance, the application of the special condition of average influences how claims are settled and reflects a common practice in insurance contracts meant to protect both the insurer and the insured by maintaining an adequate level of coverage relative to the value at risk.