Underinsurance
Underinsurance was also referred to under “Average”. To add to what was discussed there: underinsurance can be described as the amount of money still outstanding when the full value (monetary worth) of the policy is compared to the full extent of a loss covered. It is a condition arising from the insured person’s failure to buy sufficient insurance cover.
Your insurance contract specifies the basis of valuation of assets being insured, for example market value, retail value or full new replacement value. If you underinsure your car with 25% of its market value and the car is stolen, 25% will be deducted off your claim for underinsurance. This is called the average clause. For a description of the calculation of the average clause, please refer to “Average.”
Another way to describe underinsurance is that the declared value (for the purpose of calculating the premium) is less than the actual or true value of the assets in question. Being underinsured means that you are paying smaller premiums than you should have been paying. The insurer is therefore fully within his right to apply the average clause in this situation. It is within your own best interest to ensure that you are not underinsured.