Under Insurance

Under insurance is something which no-one wants to be caught out with, but the number of people who are actually under insured would probably surprise most of us. Under insurance is quite simply a situation where your insurance cover - what your insurance policy will pay out in the case of a loss and subsequent claim, is less than what it would cost to replace the lost items. This obviously means that while your insurance payout will help you towards replacing your losses, you will have to partially fund this replacement, which, depending on the cost of the item, could end up being pretty expensive - perhaps even prohibitively so - leaving you in a situation where you cannot replace what you have lost.

There are a few common reasons for under insurance. Sometimes it is just too expensive to insure the items to their full replacement value, and people reason that, while they won't be able to replace the exact item, some sort of financial compensation for their loss is better than none at all. So they're at least going in with their eyes open. The other common situation is where people don't realise that they have insured an item (or items) for its market value, not its full replacement value. This is normally inadvertent of course. In this scenario the insurance policy will pay out whatever the market value of the item was set at. Due to inflation this amount will not be enough to replace the item at the current new price (the replacement value), and the policy holder will thus be left in a situation where the insurance payout is not high enough to allow for the replacement of the item. This is probably the most common sort of under insurance encountered.

There is also a case to be made for deliberate under insurance. For example, losses incurred in respect of property are normally partial - in the case of fire damage for instance - and some shrewd people will thus only ensure for a percentage of the replacement value, which has the effect of making their premiums more equitable in relation to their likely risk. Of course this can lead to other sorts of problems, but it's all a case of playing the insurance game to the most likely benefit, and taking the risks involved.