What is under insurance? How does it affect the claims?
Suresh Surana, Bhopal
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, of you have a washing machine for Rs 20,000 and insure it for Rs 15,000, and 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 i.e. 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.