Underinsurance Explained

Example of underinsurance.

If the chosen Sum Insured is less than the actual total value of the property covered, the policyholder will not receive full settlement in the event of a loss and will be responsible for a proportionate share of a loss covered by the insurance policy.

The effect of underinsurance is shown in the following example:


You insure the stock at your business premises and suffer a theft which results in the loss of £20,000 worth of stock which needs replacing. The Chosen Sum Insured is £80,000, the actual total value of the stock Insured at time of Damage is £100,000

£80,000 ÷ £100,000 × £20,000 = £16,000

In this example: You have under Insured by 20%, the amount payable by the insurer is 80% (£16,000 before any Excess is due). The amount of the loss retained by You/the policyholder will be 20% (£4,000) (plus any Excess payable)

Note: In this example a proportional reduction is applied to the actual loss You have suffered, as Your chosen Sum Insured is less than the actual total value of property Insured at the time of loss. In this example the correct full amount which should have been the chosen Sum Insured should have been GBP100,000.

It is important to ensure the chosen Sum Insured is accurate. You should seek professional advice if You are not sure. Having the correct Sum Insured is important to You to ensure Your property is adequately Insured.

Professional advice is available from a many different sources, for example, one source is the Royal Institution of Chartered Surveyors (RICS) which operate a Building Cost Information Service (BCIS)

This article should not be considered as advice, if you want to discuss your insurance requirements you should make contact with an FCA registered insurance broker to discuss the correct requirements for your business.