What does being under insured mean in terms of compensation?

Being underinsured refers to a situation where the value of the insurance coverage is less than the actual value of the asset or the cost of the loss incurred. When a person or entity is underinsured and a claim is made, the compensation received will be based on a proportion of the loss, reflecting the insufficient coverage.

For example, if a property is valued at €100,000 but only insured for €60,000, and the property suffers a loss of €40,000, the insurance payout will only cover a percentage of the total damage. Since the coverage is incomplete, the compensation could be calculated by applying a ratio based on the insured value versus the actual value. In this instance, because the insured amount is only 60% of the actual value, the payout for the €40,000 loss might only be €24,000 (60% of the loss).

This principle emphasizes the importance of having adequate insurance coverage that corresponds to the actual value of assets to ensure full compensation in the event of a claim.