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📋 '''Under-insurance''' occurs when a [[Definition:Policyholder | policyholder]] carries [[Definition:Insurance policy | insurance coverage]] with limits, values, or terms that are insufficient to fully compensate for a loss. In [[Definition:Property insurance | property insurance]], this typically means the [[Definition:Sum insured | sum insured]] is set below the actual replacement or market value of the asset, while in [[Definition:Liability insurance | liability insurance]] it manifests as policy limits too low to cover the full extent of a [[Definition:Claim | claim]] or judgment. The problem is pervasive across both personal and commercial lines and is particularly acute in environments with rapidly appreciating property values, evolving [[Definition:Cyber risk | cyber exposures]], or inflation-driven increases in construction and repair costs.

⚙️ Many [[Definition:Property insurance | property]] policies include an [[Definition:Average clause | average clause]] (also called a coinsurance clause) that penalizes under-insurance proportionally. If a commercial building valued at $10 million is insured for only $6 million and the policy requires coverage of at least 80% of value, the insured is carrying only 75% of the required amount — meaning the [[Definition:Insurance carrier | insurer]] will pay only 75 cents on every dollar of a covered partial loss, leaving the policyholder to absorb the remainder. [[Definition:Underwriter | Underwriters]] and [[Definition:Insurance broker | brokers]] combat under-insurance by requiring or recommending professional [[Definition:Property valuation | property appraisals]], applying [[Definition:Inflation guard | inflation guard endorsements]], and conducting periodic coverage reviews. In lines like [[Definition:Directors and officers liability insurance (D&O) | D&O]] or [[Definition:Cyber insurance | cyber insurance]], where loss severity can be difficult to predict, inadequate limits represent a subtler but equally dangerous form of under-insurance.

💡 Beyond the immediate financial shortfall at the time of a loss, under-insurance can erode trust between the insured and the insurer, fuel litigation over coverage adequacy, and expose [[Definition:Insurance broker | brokers]] and [[Definition:Insurance agent | agents]] to [[Definition:Errors and omissions insurance (E&O) | errors and omissions]] claims for failing to recommend appropriate limits. From an industry-wide perspective, systemic under-insurance — particularly in catastrophe-prone regions — contributes to the [[Definition:Protection gap | protection gap]], the difference between total economic losses and insured losses following large-scale events. Regulators, industry groups, and [[Definition:Insurtech | insurtechs]] developing parametric and embedded products are all exploring ways to close this gap by making adequate coverage more accessible, transparent, and affordable.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Sum insured]]
* [[Definition:Average clause]]
* [[Definition:Protection gap]]
* [[Definition:Coinsurance]]
* [[Definition:Inflation guard]]
* [[Definition:Replacement cost]]
{{Div col end}}

Definition:Under-insurance - Revision history

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