What Is Underinsurance?

Although a good insurance policy doesn’t necessarily prevent any of life’s calamities, it should make the financial consequences easier to deal with. However, being underinsured, can leave the policyholder liable for a large financial expense if a serious event occurs. Underinsurance, refers to an insufficient insurance policy.

This occurs where the insured sum on your property is less than the value it will cost to reinstate or replace it. Insurance should ideally cover enough of the expense that the policyholder can manage the difference. For instance, buildings should be insured for their full replacement value, including the cost of demolition and debris removal.

Underinsurance What is it?


    • Underinsurance is insufficient insurance coverage.
    • Therefore, being underinsured leaves the policyholder responsible for a large percentage of the damage repair expense.
    • If a homeowner is underinsured and there’s significant damage to a residence, the insurance payout may not be enough to cover repairs or replacement.

How Does Underinsurance Work?

Policyholders are usually expected to have their homes insured to at least 80% of its replacement value. If the sum insured is below 80% of the correct value, insurers will apply a co-insurance clause. As a result, this clause will end you up with a disappointing claims settlement.

Therefore, to ensure you obtain maximum protection from a policy you need to carefully check you have an accurate estimate of the replacement costs of your property. However, the higher the sum insured, the higher the premium. For this reason, many policyholders might be discouraged from putting forward the actual sum insured when taking out a policy.

But being underinsured might result in a bigger financial loss than having to pay for a higher premium. In fact, in many cases where policies have additional benefits the Underinsurance Clause may lower the amount that you are able to claim for the damage. With this in mind, be aware that the purchase price of your property might not be the same as the current replacement cost of your property. The sum insured must either be equivalent to the current replacement value or the current market value depending on the type of policy you have. In short, your insurance agent will be able to explain what type of policy you have.

Underinsurance Form

How You May be at Risk

Many homeowners don’t know the true value of their home. As a result, it can be hard to know whether you’re underinsured.

Here are some ways you can wind up underinsured:

      • First, miscalculating the value of your home and contents.
      • Second, not accounting for additional recovery expenses such as the cost of removing debris after an incident.
      • Also, lowering your premiums without careful consideration.
      • As well as increased repair costs due to inflation.
      • Spikes in repair costs due to construction materials increasing in price.
      • Finally, high demand for construction services after a major event, resulting in higher repair costs

Inflation and spiked repair costs might be out of your control. However, many insurance companies offer protection for these sorts of events. Of course, this would be through higher premiums.

How to Avoid Residential Underinsurance

First, review your policy

Renovations can increase the value of your home or property, and how much it would cost to rebuild it. Therefore, if you don’t adjust your sum insured accordingly, you could be left underinsured.

Moreover, if it’s been a while since you purchased your policy, you should also verify your coverage. Especially if you do anything to your home that could affect the sum insured you need.

Second, shop around for insurance

If you experience a premium rate increase, shop around. There are plenty of insurance options to choose from to better suit your insurance needs. You may be able to find a less expensive option that still provides ample coverage. Don’t just opt for a lower premium without taking into consideration the consequences of being underinsured.

Also, ask about higher deductibles

If you want to stay with your current insurer, ask for a quote for a policy with a higher deductible that maintains good coverage. With this in mind, higher deductibles should mean lower premiums and may be worth it if the reduction is significant. Especially if you are still well covered.

Finally, check the policy’s exclusions.

Most standard homeowners insurance policies have certain exclusions. For example, earthquake and flood damage is usually not included in a standard policy. Especially if you live in a high risk area. In order to be covered during a natural disaster you’ll likely have to buy a separate policy specific to that type of damage.

Underinsurance Terms and Conditions

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Many homeowners never read their homeowners’ insurance policy. Then a covered loss, like a fire or hurricane, causes extensive damage to the home and contents. Of course, the homeowner files a claim with her insurance company. Eventually, the homeowner gets a claim settlement offer from the home insurance company. However, only then does the homeowner learn the difference between actual cash value v. replacement cost value coverage.

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