To avoid an insurer checking the validity or adequacy of the sum insured every time they take on a new property insurance risk, the insurance company will limit their own liability by applying a condition to the policy known as:

• A. reinstatement condition
• B. indemnity risk
• C. contingency factor
• D. average clause

Answer: (D)

The main idea is a proportional settlement rule known as an average clause. It automatically limits the insurer’s liability if the sum insured is less than the property's actual value, by paying only a proportion of the loss based on the ratio of sum insured to actual value.

For example, if the property’s real value is 200,000 but it’s insured for only 120,000, and a loss of 80,000 occurs, the insurer would pay (120,000 / 200,000) × 80,000 = 48,000. The insured covers the remaining 32,000. This mechanism discourages under-insurance and means the insurer doesn’t have to re-verify the adequacy of the sum insured for every claim.

Other terms serve different purposes (for instance, reinstatement focuses on restoring coverage after a loss, not on adjusting the payout for under-insurance), so the clause that directly ties payout to the actual value versus the sum insured is the one that limits liability automatically in the way described.