An average clause reduces a covered property claim proportionally when the sum insured is below the value required by the policy. It encourages adequate valuation rather than insuring only a fraction of property while expecting full payment for a partial loss. The clause may contain thresholds or exceptions that alter its operation.
Suppose Nepalese stock is valued at NPR 2 million but insured for NPR 1 million. A NPR 200,000 covered loss could be reduced to NPR 100,000 before other deductions if a simple proportional average clause applies. This is illustrative only; the contract's valuation basis and exact wording control the calculation.