What is under insurance? How does it affect the claims?
In case of general insurance, under insurance plays a crucial role
What is under insurance? How does it affect the claims?
Rupa Dave, Delhi
Under insurance could be in case of both life and general insurance. While almost every life insurance is under insurance, as life is priceless and hence, the concept of under insurance could be fuzzy with life insurance. However, in case of general insurance, under insurance plays a crucial role; for instance if an asset is insured for less than its actual value, in insurance parlance it 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. So, in case there is a loss for Rs 4,000, the insurers will pay only Rs 3,000, which is in the same ratio as the sum insured has with the cost of the washing machine 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.