When you provide professional advice or services, underinsurance isn’t just about having too little cover. It’s about how that underinsurance is penalised under the terms of your policy. Many professional services businesses discover too late that their Professional Indemnity (PI) insurance includes an Average Provision clause that significantly limits what the insurer will pay when a claim exceeds the sum insured. Understanding this clause is critical to protecting your business.
For a comprehensive overview of Professional Indemnity insurance, what it covers, who needs it, and the claims-made basis, see our Professional Indemnity Insurance page. This article focuses specifically on sum-insured sizing and the Average Provision clause, which are key to ensuring your coverage protects you when it matters most.
What is the Average Provision?
The Average Provision is a clause in your PI insurance policy that reduces your claim payout if your sum insured turns out to be inadequate. It’s sometimes referred to as an underinsurance penalty or co-insurance clause. Here’s the principle: if your policy limit is insufficient to cover the full value of a claim, the insurer calculates what percentage of the claim falls within your limit and then pays only that percentage of both your settlement and defence costs.
In practice, this means if you’ve underestimated your exposure and set your limit too low, you won’t just lose money on the gap in coverage, you’ll also lose money on the defence costs the insurer would otherwise cover.
When Does Average Provision Apply?
Average Provision applies to Professional Indemnity policies that include a “defence costs exclusive indemnity limit.” This means the policy includes provision for the insurer to cover reasonable costs such as:
- Legal costs for defending and responding to claims
- Claim investigation expenses
- Settlement and negotiation costs
- Expert fees and assessments
If your policy instead has “defence costs within the limit,” the mechanics differ; you should confirm with your broker which applies to your cover.
Will the Average Provision Apply When I Make a Claim?
The Average Provision applies when the compensation payment you must make to resolve a claim exceeds your policy’s sum insured limit. At that point, the insurer calculates the percentage shortfall and applies it to both settlement and defence costs.
Example: A Real Scenario
Imagine your business has a PI policy with a defence costs exclusive indemnity limit set at $1m, and it includes an Average Provision clause.
A client takes legal action against you. Your legal defence determines the claim should settle at $2m compensation to the client.
Your policy limit of $1m covers only 50% of the settlement amount. The Average Provision states that the insurer will therefore pay only 50% of all costs, both the compensation and the defence costs.
Here’s what that looks like in practice:
| Your Policy Limit | $1,000,000 |
|---|---|
| Third Party Compensation Payment | $2,000,000 |
| Limit minus compensation amount | -$1,000,000 (or 50%) |
| Average Provision for the Insurer | 50% |
| Insurers 50% Average Provision contribution to Third Party Compensation | $1,000,000 |
| Your Gap Payment to Third Party Compensation Payment | $1,000,000 |
| Your Total Costs to Defend the Claim | $750,000 |
| Insurer’s50% contribution to your defence costs | $375,000 |
| Your Gap Payment for your defence costs | $375,000 |
| Total Out of Pocket Costs to You | $1,375,000 |
In this scenario, despite having insurance, your business must cover $1.375m of the total $2.75m in costs, over 50% of the financial impact.
How to Address Average Provision Risk
The best way to manage this risk is to work with an experienced insurance adviser to assess your actual professional exposure and ensure your sum insured reflects realistic claim scenarios for your business. This assessment should consider:
- Your revenue and the value of client relationships at risk
- The typical financial impact if advice or services resulted in client loss
- Industry-specific claim patterns and settlement ranges
- Contractual requirements your clients may impose on your coverage limits
- Your financial capacity to absorb an uninsured gap
Setting a higher sum insured does increase your premium, but it replaces that additional cost with financial protection rather than personal financial exposure. Your adviser can help you model different scenarios and find a balance that protects your business without over-insuring.
Review Your Current Coverage
You don’t need to wait until renewal to review your sum insured. If your business has evolved, if you’ve taken on larger clients, higher-value engagements, or expanded your service offering, your coverage should evolve too. Your adviser can:
- Explain how your current policy calculates claims payments
- Assess whether your sum insured aligns with your current business exposure
- Model claim scenarios specific to your profession and client base
- Help you adjust coverage mid-policy if needed (usually with a pro-rata premium adjustment)
A professional adviser relationship provides ongoing reassurance that your insurance protects your business as your circumstances change.
Professional Indemnity Underinsurance:
Frequently Asked Questions
What exactly does the Average Provision clause do?
It penalises underinsurance by reducing the insurer’s payout if your policy limit doesn’t cover the full claim. If you’re underinsured by 50%, the insurer pays only 50% of both settlement and defence costs. You pay the gap.
How do I know if I’m setting my sum insured correctly?
There’s no universal formula. It depends on your revenue, the type of advice you provide, the financial scale of client engagements, and what a realistic worst-case claim scenario looks like for your profession. Your adviser can help you think through realistic exposure scenarios specific to your business.
Does every PI policy have an Average Provision clause?
No. Some policies are structured differently. The clause typically applies to policies with a “defence costs exclusive indemnity limit.” Always confirm with your broker whether your policy includes this clause and how it operates.
What if a claim comes in and I discover I’m underinsured?
You’ll be responsible for the shortfall, both the settlement amount beyond your limit and a proportionate share of defence costs. This can mean substantial out-of-pocket expense even when you thought you were covered. It’s not a theoretical risk; it happens.
Can I increase my cover mid-policy?
Generally, yes. If your business has grown or taken on more significant engagements, talk to your adviser about adjusting your limit. You’ll pay an additional premium, but it’s protection against future underinsurance exposure.
Are there other ways to manage underinsurance risk besides higher limits?
Your adviser can discuss the full range of coverage options available, including policy structure, excess levels, and extensions specific to your profession. The key is ensuring your coverage reflects your business exposure.
Next Steps
Professional Indemnity insurance is one of the most important decisions a service-based business makes. Getting the sum insured right is essential to ensuring that coverage protects you when it’s needed most.
If you’d like to discuss your current professional indemnity insurance or assess whether your sum insured aligns with your business exposure, contact our team for a confidential review. You can call Clear Insurance on 1300 721 132 or email info@clearinsurance.com.au.
General Advice Warning: This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is appropriate for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement.
Clear Insurance Pty Ltd. ABN. 41 601 916 689. AFSL No. 548953.
Last Updated: 26 August 2026