Underinsurance

What is underinsurance?

Underinsurance is when an individual or business has insurance coverage that is

insufficient to cover the full extent of their losses.

Underinsurance can occur when an individual purchases a policy with too low of limits,
fails to update their policy as their needs change, or makes a claim for damages that
exceed their policy limit.

Underinsurance can also occur when a business purchases a policy that does not cover all
of its potential risks. This can have serious consequences, including financial hardship and
the inability to fully recover from a loss.

How does underinsurance happen?

Underinsurance can happen for a number of reasons. It may be that the insured doesn’t
fully understand their coverage, or that they’re not aware of all the potential risks they face.

In some cases, people may intentionally under insure in order to save money on premiums.
However, this can be a risky strategy, as it may leave the policyholder without adequate
coverage if they need to make a claim.

Underinsurance can also occur when a policy is not properly updated to keep pace with
inflation or changes in the insured’s circumstances.

What is the average clause?

The average clause is often added to insurance and can be found in the small print of your
insurance documents.

The average clause is a way of insurers paying out less than they need to if a policyholder is
paying less than the premium they should be because they have inadequate cover.

Insurers apply the average clause and only payout a proportionate amount for what you are
claiming based on how much you are underinsured by.

The average clause Is there to ensure that policyholders declare the proper value of their
goods and so pay the correct premiums.

What happens if I’m underinsured?

Underinsurance can have a number of consequences. If you are underinsured, you may not
be able to make a claim for all of the damage that has been done to your property.
This could leave you with a hefty bill to pay for repairs yourself.

Underinsurance can also invalidate your insurance policy, meaning that you will not be
covered at all if something goes wrong. This could leave you facing financial ruin if you need
to make a claim.

Your Insurer may apply the average clause to your claim meaning the payout could be
considerably less than your claim.

Example One:

A contractor buys machinery for £10,000 (second-hand) so they insure it for the same value
however if they need to claim on the insurance they aren’t able to get that specific piece of
machinery for £10,000, brand new the machinery would be £15,000 then they are
underinsured by 1/3rd.

The Insurer could then apply the average clause and only pay out 2/3rds of the £10,000
claim minus the policy excess amount. This makes the payout significantly less than the
£15,000 required to replace the machine.

Who can be affected by underinsurance?

Underinsurance can happen to any insurance policy. Whether its property, buildings,
contents, business or vehicle insurance so it’s important to make sure you fully understand
the value of what you are insuring.

Understanding of Salvage

Abandonment and salvage is a term that can surface fairly frequently in insurance
contracts. When such a clause is present, it indicates that the insurer has the ability to
rightfully claim an insured asset or piece of property that has been destroyed and
subsequently abandoned by its owners.

For the insurer to salvage the item, the owner must first express an intent of abandonment
in writing. Once that process is complete, the insurance company could choose to take full
possession of the damaged property after paying out its insured value to the policyholder

Condition of salvage

In cases of partial loss and salvage, the insured can claim only the amount of the loss or
damage sustained, meaning they cannot abandon the property and claim full value.

If the insured surrenders the remains of the property and the insurer also agrees to accept
the salvage, the claim would be paid in full and the insurer would become the owner of the
salvage. In cases of clear-cut total losses, insurance would pay in full, so the insurer is
entitled to the benefit of the salvage.

With an underinsured total loss, the insured would not be fully covered. They would be
entitled to salvage, but only to the extent that the loss payment plus the value of salvage
does not exceed the full loss or actual indemnity.

Principles of Insurance

In insurance, there are 7 basic principles that should be upheld, ie Insurable interest,
Utmost good faith, proximate cause, indemnity, subrogation, contribution and loss of
minimization.

1.Principle of Utmost Good Faith

This is a primary principle of insurance. According to this principle, you have to disclose all
the information that is related to the risk, to the insurance company truthfully.

You must not hide any facts that can have an effect on the policy from the insurer. If some
fact is disclosed later on, then your policy can be cancelled. On the other hand, the insurer
must also disclose all the features of a life insurance policy.

2.Principle of Insurable Interest

According to this principle, you must have an insurable interest in the life that is insured.
That is, you will suffer financially if the insured dies. You cannot buy a life insurance policy
for a person on whom you have no insurable interest.

3.Principle of Proximate Cause

While calculating the claim for a loss, the proximate cause, i.e., the cause which is the
closest and the main reason for a loss should be considered.

Though it is a vital factor in all types of insurance, this principle is not used in Life
insurance.

4.Principle of Subrogation

This principle comes into play when a loss has occurred due to some other person/party
and not the insured. In such a case, the insurance company has a legal right to reach that
party for recovery.

5.Principle of Indemnity

The principle of indemnity states that the insurance will only cover you for the loss that has
happened. The insurer will thoroughly inspect and calculate the losses. The main motive of
this principle is to put you in the same position financially as you were before the loss. This
principle, however, does not apply to life insurance and critical health policies.

6.Principle of Contribution

According to the principle of contribution, if you have taken insurance from more than one
insurer, both insurers will share the loss in the proportion of their respective coverage.

If one insurance company has paid in full, it has the right to approach other insurance
companies to receive a proportionate amount.

7.Principle of Loss Minimisation

You must take all the necessary steps to limit the loss when it happens. You must take all
the necessary precautions to prevent the loss even after purchasing the insurance. This is
the principle of loss minimization

Micro Insurance:

Micro insurance is specifically intended for the protection of low -income people, with
affordable insurance products to help them cope with and recover from financial losses.
The need of insurance for underprivileged section cannot be avoided as this section of
society is more prone to many risks which ultimately leads to incapacity to face such
uncertain situations. Hence, the role that micro insurance plays thus becomes inevitable.

Micro Insurance Regulations

What are the governing provisions for Micro Insurance?

Insurance Regulatory and Development Authority of India (Micro Insurance) Regulations,

2015 (Hereinafter referred to as “Regulations”).

What is a Micro Insurance Policy?

As per the Regulations, micro insurance policy is an insurance policy sold under a plan
which has been specifically approved by the Authority as a micro-insurance product.

What is a Micro Insurance Product?

As per the Regulations, Micro Insurance Product includes a general micro-insurance

product or life insurance product or health insurance product, proposal form and all
marketing materials in respect thereof