Underinsurance: 10 Critical Facts for Adequate Protection

Underinsurance occurs when the limits or coverage of an insurance policy are insufficient to fully protect against potential risks and losses. Failing to maintain adequate coverage can have devastating financial consequences, leaving policyholders vulnerable and exposed.

As an insurance broker, it’s our responsibility to ensure our clients are properly informed and equipped to avoid the pitfalls of underinsurance.

In this comprehensive guide, we’ll explore 10 essential facts about underinsurance that every policyholder should know.

#1: Underinsurance is More Common Than You Think

Contrary to popular belief, underinsurance is not isolated to a few select industries or individuals. It’s a widespread issue that affects businesses and households across a vast array of insurance products, from commercial property coverage to personal auto policies.

#2: Inflation Can Rapidly Erode Coverage Limits

The real value of your insurance limits can quickly diminish due to inflation. As the cost of replacement, repair, and medical expenses rise over time, your policy limits may no longer provide adequate protection, leaving you responsible for the difference.

#3: Changing Circumstances Require Policy Adjustments

Major life events, such as purchasing a new home, starting a family, or expanding a business, can significantly alter your insurance needs. Failing to update your coverage accordingly can result in underinsurance, exposing you to uninsured risks.

#4: Coinsurance Clauses Can Reduce Claim Payouts

Many insurance policies include coinsurance clauses, which require policyholders to maintain coverage at a specified percentage of the total replacement value. If you fail to meet this requirement, your insurer may reduce claim payouts proportionately.

#5: Specialty Equipment and Collections Require Specialist Coverage

Standard homeowner’s or business insurance policies may not provide sufficient protection for high-value or specialized assets, such as fine art, antiques, or commercial equipment. Supplemental coverage is often necessary to ensure adequate limits.

#6: Inadequate Commercial Auto Coverage Can Cripple a Business

In the event of a major accident involving a company vehicle, insufficient commercial auto insurance can lead to substantial out-of-pocket expenses for the business, including legal fees, settlements, and regulatory fines.

#7: Underinsuring Commercial Property Can Be Disastrous

Failing to maintain adequate commercial property coverage can have catastrophic consequences. In the aftermath of a fire, natural disaster, or other major incident, an underinsured business may be unable to recover, leading to financial ruin.

#8: Personal Liability Limits Must Keep Pace with Asset Growth

As your personal wealth and assets grow, so too should your liability insurance limits. Neglecting to update your coverage can leave you vulnerable to lawsuits that exceed your policy’s protection, putting your hard-earned savings and investments at risk.

#9: Bundling Policies Can Create Coverage Gaps

While bundling insurance policies can provide cost savings, it’s essential to carefully review the terms and exclusions to ensure there are no gaps in your overall coverage. Relying solely on a “one-size-fits-all” bundled policy may leave you underinsured.

#10: Consulting an Expert is the Best Defence

Working closely with an experienced insurance broker is the surest way to identify potential coverage gaps and implement a comprehensive risk management strategy to safeguard your assets and financial well-being.

Remember, the cost of adequate coverage is far outweighed by the price of being caught underinsured. Contact our team of experts to discuss your requirements.