In property insurance, the term underinsurance or under-coverage refers to a situation in which the sum insured is lower than the value of the insured property.
Underinsurance is a common occurrence in household insurance, which should be avoided.
The disadvantage of being underinsured is that, in the case of a loss, you will only be partially compensated, in proportion to your underinsurance. The formula used here is:
Compensation = loss*(sum insured/property value)
Because the value of insured property can fluctuate, it is possible that while you might be properly insured at the time you take out a policy, you could end up underinsured after acquiring new property.
Example: A household with an estimated value of 100,000 francs is covered by a sum insured of 100,000 francs. After one year, the policyholder buys new furniture worth 25,000 francs. This raises the value of their property to 125,000 francs.
Unless the policyholder raises the sum insured by their policy to 125,000 francs, they will be underinsured by 25,000 francs, or 20 percent.
Because of this, the benefits paid out in the case of losses could be cut by 20 percent. For example, if a loss resulted in a 5000-franc claim, only 4000 francs would be covered.
When a waiver of underinsurance applies, the insurer agrees not to check whether or not a policyholder is underinsured when they make a claim.