Average clause addresses the situation where new employees may join, or old employees leave the organisation after the policy has come into force. To address the gap in the number of employees (or average income) covered and the actual existing insurer can prorate the sum assured to cover all available employees under this clause.

The average clause applies to the policies with the following conditions:

  • If the insured lists a lower number of employees under the policy than the number of employees at the date of the accident:
    • All the employees need not be on duty on the day of the accident.
    • The insurer will indemnify the firm proportionately,
    • Proration will be such that all the employees employed at the date of the accident are covered proportionately to the number of employees listed under the policy.

Read More: What is the Workmen’s Compensation Act?

  • If the company (insured) has declared the lower amount of wages for this policy than the actual wages disbursed until the date of the accident:
    • The insurer will first estimate and establish that the wages being paid at the time of the accident are higher than the wages declared in the policy by comparing:
      • Estimate the wages declared as per average wage and number of employees.
      • Estimate the wages paid at the time of the accident.
    • The insurer will indemnify proportionately to the declared wage over the paid wage till the date of the accident.
  • The Average Wage limits Insurer’s Liability:
    • Employer’s liability can be estimated based on a higher wage for an employee
    • Insurer’s liability will remain limited to the average wage of the category to which the employee belongs
    • However, if documents are provided to substantiate the proof of higher wage paid to the employee insurer may revise the indemnity

Whenever multiple of these clauses apply, the insurer will opt for the clause which offers the least payment towards the insured (the employer). 

Case on Average Clause in Workers’ Compensation Insurance

Craft Moulders Pvt. Ltd. is one of the largest wood furniture suppliers in India. Total Employee strength at Craft was 122 when they renewed their worker compensation insurance for 2017. Craft promotors started another unit for manufacturing new modular wooden furnishing in Mysore early this year due to the popular demand and new market taste.

The promotors transferred 15 of the employees from Craft Moulders to the new unit Craft Modular Pvt. Ltd. to establish the manufacturing in full swing. In June 2017, Craft Moulder had only 100 employees remaining. One of the employee, Shobh Ram, got injured while unloading the wooden logs from the carrier.

Shobh Ram was hospitalized for about three weeks before he could resume work and thus a claim under workmen compensation insurance was filed and paid as per his monthly salary.

On the other hand, the new setup had been attracting workers, and their worker strength stood up at 130 in July 2017, up by 30 from the time of purchase of the workmen compensation policy.

Read More: What Is the Purpose of Workmen’s Compensation?

The insurance covered 100 employees at an average income of Rs. 15,000 per month. On July 15, two of the employees got injured while transporting goods by road, both will stay hospitalized for a month at least, and can resume work only after about two months.

As per the claim filed in this case, the insurer will only bear the prorated claim as per the new average wage and number of employees in the firm. Craft Modular will bear remaining amount.

The amount of claim as per their monthly salaries for both the driver and worker can be between Rs. 15,000 to Rs. 20,000 (Rs. 3000 payable every half months for one and a half months). The insurer will prorate the amount as per new employee strength of the company:

3000 × 100 ÷ 130 = Rs. 2308

Remaining Rs. 692 should be paid by Craft Modular Pvt. Ltd.

This payment is separate from the healthcare expenses (hospital bills) covered under the plan which was also prorated by the insurer before payment. Since there was no change in the average wage of the employees in this category only one clause was applicable.

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