What Is an Insurance Margin Clause?

An insurance policy may include an insurance margin clause. This stipulation plays a part in determining any payout made on the policy. It is not always a beneficial feature to have.

Definition

An insurance margin clause allows an insurer to pay up to a certain percentage over and above the reported value of an insured item. Margin clauses usually allow for a 110 percent, 115 percent and even a 150 percent payout of the insured item's reported value.

Exercise of Clause

Suppose a building with a reported value of $2 million is burned down. The insurance policy on the property has a 110 percent margin clause on it. The insurer determines that the replacement value of the property to be $2.5 million. However, because of the margin clause, the insurance payout before any applicable deductible will only be $2.2 million. This includes the reported value and a 10 percent margin.

Significance

In this case, the insured would have been better off without the margin clause; he or she would have received a payout of $2.5 million.

Consequently, If you are researching possible insurance policies, be aware that a policy containing an insurance margin clause is not always beneficial.

References

• Willis: Keeping Our Eyes on the Ball