Underforsikret

Underforsikret, or underinsured, describes a situation where the value of an insured item or risk is greater than the amount of insurance coverage allocated. In practice this means the policy does not fully transfer the financial risk to the insurer, and a loss can leave the insured with uncovered costs.

The term is most commonly used in property and casualty insurance, such as home or business property. When the sum insured is less than the replacement cost or the loss exposure, settlements after a claim may be reduced proportionally. In many policies this is known as an average or pro rata settlement: the payout equals the ratio of the insured amount to the actual value of the loss, potentially leaving the policyholder responsible for the difference.

Causes of underforsikret include outdated valuations, rising rebuild or replacement costs, and choosing a lower coverage level to lower premiums. Changes to a property, such as renovations or expansions, and neglecting to update coverage after acquisitions can also create underinsurance. For mortgage lenders and some contracts, insurers may require minimum coverage aligned with loan amounts or policy terms.

Consequences can be significant. Underinsurance can lead to higher out-of-pocket costs after a loss, delayed rebuilding, and financial strain. It may also reduce access to certain types of coverage or remedies offered by insurers.

To avoid underforsikret, policyholders should regularly reassess and adjust coverage to reflect current replacement costs and risk exposure. This includes obtaining up-to-date appraisals or rebuild estimates, considering replacement-cost rather than market-value coverage, and reviewing policies after major changes or renovations.