Underinsurance

What it means

Underinsurance means the agreed sum insured is below the real value of the insured property. The insurer then cuts the payout in the same proportion by which the sum was too low, and it does so even on a small partial loss.

It is not the same as an excess. An excess is an agreed slice of every loss that the insured knows about in advance, while underinsurance is a mismatch nobody notices until the day the loss adjuster compares the sum insured with the value of the property.

No proportional cut applies to first-loss cover. There the sum insured is agreed as a cap on the payout with no link to the total value of the property, and the insurer pays in full up to that cap. In property insurance it is used, for example, for cash or valuables, where insuring the whole value would be needlessly expensive.

How it works in practice

Sums insured are reviewed after every sizeable investment, improvement or change in stock levels. Policies often carry an indexation clause that lifts both the sum and the premium automatically, but it will not add a new machine or an extension for the owner.

Value has to be read the way the insurer reads it: with replacement-cost cover it is what buying the asset again costs, not the carrying amount after depreciation. Alongside the sums insured it pays to read the exclusions, because a payout can be trimmed from both ends.

When a company invests in refurbishing rented premises, the capital improvement sits in its own assets, while the landlord insures the building. At renewal we therefore check that the improvement appears in the tenant’s policy, or after a fire nobody pays for precisely what the company paid for.

What to watch out for

Stock gets insured at its average level and burns in December, when the warehouse holds three times as much. The insurer pays a fraction and the company funds the rest itself, usually at the exact moment the goods are paid for and not yet sold.

With several sites the sum insured is often agreed separately for each insured location. If the company moves goods or machines to another warehouse without updating the policy, it is underinsured at the new site and pays for empty space at the old one, even though the stock records show the move plainly.