China Industries filed a claim for £2,000 after a break-in, but the loss adjuster applied average condition. What would the final settlement amount be if the sum insured was £7,500 and goods in stock were worth £10,000?

In this scenario, the average condition clause comes into play when a policyholder is underinsured at the time of a loss. Here, the sum insured is £7,500, but the actual value of goods in stock is £10,000, meaning China Industries is underinsured by £2,500.

When the average condition clause is applied, the loss is calculated proportionately based on the ratio of the sum insured to the actual value of the goods. The formula to find the settlement amount is:

Settlement Amount = (Sum Insured / Actual Value) x Claim Amount

Using the values provided:

Settlement Amount = (£7,500 / £10,000) x £2,000 Settlement Amount = 0.75 x £2,000 Settlement Amount = £1,500

Thus, the final settlement amount would be £1,500. This demonstrates how underinsurance impacts the claim amount and how the average condition works to adjust the settlement fairly in relation to the actual risk covered.