What is under insurance and how does it affect the claims?
The principal of under insurance comes into play in the event of a partial loss to an asset
What is under insurance and how does it affect the claims?
Sarvesh Kumar, Noida
Most people’s lives are underinsured in India, because many do not know about the right amount of life insurance that they need. While, the argument that one’s life is priceless may hold good in general, it does not hold good when one is underinsured and the dependents face the financial implications after the demise of the bread earner. The same problem exists in the case of asset insurance as well, as people tend to insure their assets for less than its actual value, which in insurance parlance is said to be under insured.
The principal of under insurance comes into play in the event of a partial loss to an asset. Typically it means that the insured is considered to be the self insurer to the extent of under insurance and therefore, becomes liable to bear a proportion of the loss. For instance, if you buy a washing machine for Rs 20,000 and insure it for Rs 15,000, then you will be considered to be the self-insurer to the extent of Rs 5,000. In case there is a loss for Rs 4,000, the insurers will pay only Rs 3,000, in the same ratio as the sum insured has with the cost of the air conditioner and because of under insurance, you will be required to bear Rs 1,000 in the proportion of risk retained by you. Therefore, it is always advisable to get an asset adequately insured.