Underinsurance occurs when the sum insured is less than the actual value of the property or interest at the time of loss. When underinsurance exists, some policies may contain average (or coinsurance) clauses that reduce claim payments proportionately, meaning the insured effectively becomes a co-insurer for the shortfall. For example, if property valued at $200,000 is insured for only $100,000 (50% of actual value), the insurer may pay only 50% of any claim, regardless of whether the loss is partial or total. This makes the insured bear the financial consequence of inadequate coverage. Underinsurance commonly arises from failure to review and increase sums insured in line with inflation, construction cost increases, or business growth, leaving policyholders exposed to significant out-of-pocket losses even when they believed they held adequate insurance.
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