UNDER INSURANCE
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raunav
Underinsurance refers to inadequate insurance coverage held by a policyholder. In the event of a claim, underinsurance may result in economic losses to the policyholder, since the claim would exceed the maximum amount that can be paid out by the insurance policy. While underinsurance may result in lower premiums paid by the policy holder, the loss arising from a claim may far exceed any marginal savings in insurance premiums. Underinsurance can cause a serious financial crisis, depending on the asset that is insured and the extent of the shortfall in insurance.
For example, you insure your house for £100,000. However, the full cost to rebuild your house is actually £150,000. In this case you have only insured a proportion (2/3rds) of the rebuild cost. If there is then a fire, and the repair costs are £60,000, the insurer will only pay £40,000 or 2/3rds of your claim for the repair costs of £60,000. This is because you only insured the house for 2/3rds of the cost of rebuilding it.
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