Definition
Underinsurance
Underinsurance is holding a sum insured lower than the actual value at risk, leaving the policyholder to bear part of any loss.
In property and health cover, underinsurance commonly triggers the average clause (in property) or out-of-pocket shortfalls (in health), where the insurer pays only in proportion to the cover taken versus the true value. A home insured for half its rebuilding cost may have claims scaled down by half.
Underinsurance is rampant in India, where many hold token health sums that medical inflation has rendered inadequate. Periodically reviewing sums insured against current rebuilding costs and hospital expenses is essential to avoid nasty surprises at claim time.
Related terms
- Indemnity PrincipleThe principle of indemnity ensures an insured is restored to their pre-loss financial position but cannot profit from a claim, applying to general insurance.
- Average ClauseThe average clause is a condition in property insurance that reduces a claim proportionately if the asset is underinsured at the time of loss.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.