What does the term “underinsurance” refer to?

The term “underinsurance” specifically refers to having insufficient insurance coverage to cover the total value of potential claims. When a policyholder is underinsured, it means that the amount of insurance they have purchased is less than the total value of the assets or risks they need to protect. This can lead to significant financial loss in the event of a claim since the insurance payout may not fully cover the loss or damage incurred.

For example, if a homeowner's property is valued at $300,000 but they only have $200,000 in coverage, they are underinsured by $100,000. This situation often arises from a lack of awareness about the true value of one’s possessions or market fluctuations that increase property values over time. Understanding the concept of underinsurance is vital for both policyholders and adjusters to ensure adequate protection and to avoid severe financial repercussions following a loss.