What is underinsurance?
Underinsurance is a situation that occurs when the value of the insured object or interest, as reflected in an insurance policy, is less than its actual value.
When a claim occurs under these conditions, the insurer is entitled to apply the so-called proportional rule. As a result, the compensation will be less than the value of the damage suffered.
What might at first appear to be a saving in the cost of insurance for the insured may turn out to be a considerable financial loss. The reductions in compensation can be very significant.
Some insurers offer contracting modalities that allow avoiding this situation. This is the case of coverage such as "first risk" insurance or "estimated value" contracting, where the insured value is agreed in advance with the insurer.
Consequences of underinsurance
When a situation of underinsurance arises, two different scenarios may arise, depending on the extent of the damage:
Partial loss
If the loss only partially affects the insured property, the compensation that the insured person receives is calculated by applying the so-called proportional rule. This mathematical formula takes into account the proportion between the insured capital, the real value of the property and the amount of the damage.
More details on this formula and a practical example can be found on our "proportional rule" page.
Total loss
If the loss completely affects the insured property, i.e. it is a total loss, the compensation will be equal to the insured capital. In this case, no deductions are applied, since the insured value is, in itself, lower than the real value of the property.
Even so, the insured suffers a financial loss, receiving compensation that is less than the actual value of the insured object.
How can underinsurance be avoided?
The best way to prevent underinsurance is to seek the advice of a true professional in the sector. Together with him, it is advisable to analyse not only the valuation of the property, but also other key aspects related to the risk to be insured.
Not everyone who works in insurance can be considered a professional. In many cases, the best offers come from people who do insurance on a temporary basis. These people may insure goods below their real value in order to offer very attractive prices and close the sale, even if they are not always aware of the consequences.
For this reason, it pays to rely on insurance brokers and brokerages. They are trained and prepared, and their work is regulated and supervised by the Directorate General of Insurance (DGSFP). This makes them the best qualified professionals to provide impartial and independent advice, and to responsibly manage the contracting and protection of your assets.