What is "underinsurance"?

Underinsurance refers specifically to the scenario where the amount of insurance coverage an individual or entity has is insufficient to cover the total value of a loss they may incur. This means that in the event of a claim, the compensation received from the insurer would not be enough to restore the insured to their previous financial position or to replace the lost or damaged property, leading to a financial shortfall.

For example, if a property owner has a homeowners insurance policy that covers $200,000 but their home is worth $300,000, they are considered underinsured. In the case of a total loss, the owner would receive only $200,000 from the insurer, leaving them with a $100,000 gap that they would have to cover out of pocket.

This concept is critical for property owners and businesses to understand so that they can adequately assess their insurance needs and ensure they have sufficient coverage to protect against potential losses.