We would like to draw your attention to the condition of average under your various policies.

When a sum insured is declared to be subject to average, if the property covered thereby shall break out of any fire or at the commencement of any other peril thereby insured against be collectively of greater value than such sum insured, then you shall be considered as being your own Insurer for the difference and shall bear a rateable share of the loss accordingly.

The effect of the condition is to make the Insured who is not fully covered bear a rateable proportion (or prorata share) of every loss that he suffers.  He is entitled to recover only such a proportion of his loss as the sum insured by his policy bears to the collective value of the property covered. For example, if he insures for only half the value of the property at risk he will be entitled to recover only one half of his loss, whatever that loss may be as follows:-

REINSTATEMENT BASIS OF SETTLEMENT.
If after a loss it is intended to rebuild the premises or to replace damaged machinery with new equipment, this form of cover enables you to claim in full without deduction for wear, tear or depreciation subject to Sum Insured be being adequate, provided you actually reinstate/replace the Property within 12 months of date of Loss.

THE INTERRELATIONSHIP BETWEEN THE CONDITION OF AVERAGE AND THE REINSTATEMENT BASIS OF SETTLEMENT.
Under the Reinstatement Basis of Settlement the full replacement value on which insurers will calculate under insurance is defined as the replacement cost at the time the reinstatement damage is actually carried out, and not the replacement cost at the time of the loss.  The difference can be quite considerable as there is usually some delay in replacement for various reasons such as obtaining planning permission, and the general shortage of materials.

Consequently, when arriving at Sums Insured, consideration should be made for losses occurring at or near the end of the period of insurance and possibly taking a further 12 months to reinstate.  In fact, Sums Insured should represent replacement values over a project of at least 2 years form inception of any period of insurance