Underinsurance (Unterversicherung)
Underinsurance exists when the agreed sum insured is lower than the actual insured value; the indemnity is then reduced in accordance with the proportionality rule.
Concept
Underinsurance exists when the sum insured agreed in the insurance contract is lower than the actual insured value of the insured property at the time of the loss. It frequently arises when the policyholder set the sum insured too low at contract inception, or failed to adjust the sum insured for a subsequent increase in value, for example due to rising construction costs or extensions.
The Proportionality Rule
In the event of a loss, where underinsurance exists, the insurer applies the proportionality rule: the indemnity is reduced in proportion to the ratio of the actual sum insured to the sum insured that would have been required, regardless of whether a total or partial loss has occurred. If, for example, the sum insured amounts to only 80% of the actual insured value, the insurer will consequently indemnify only 80% of the loss incurred.
Avoidance through a Waiver of the Underinsurance Defense
To avoid the disadvantageous consequences for the policyholder of undetected underinsurance, many insurers offer the option of a contractual waiver of the underinsurance defense, provided the sum insured was properly determined using a recognized method such as the square meter method or a detailed valuation; in this case, the insurer waives its right to invoke underinsurance in the event of a loss.