What is "underinsurance"?

Underinsurance refers to a situation in which an individual or entity does not possess adequate insurance coverage to fully protect against potential losses. This can occur when the value of the insured property or the potential costs of a claim surpass the limits set by the insurance policy. For example, if a property is valued at $300,000 but only insured for $200,000, the policyholder risks significant financial loss in the event of a total loss, as the insurance would not cover the full value of the property.

In context, having an insufficient amount of coverage can lead to severe financial strain during a loss event, as the policyholder would need to bear the cost of losses that are above the policy limits. Therefore, understanding the implications of underinsurance is critical for individuals and businesses to ensure they protect their assets effectively and mitigate potential financial hardships in the event of a loss.

The other options present definitions that do not accurately capture the essence of underinsurance. Having more coverage than necessary refers to overinsurance, which is the opposite of underinsurance. Insurance that does not meet legal requirements points to non-compliance, which does not inherently relate to how much coverage is provided. Lastly, insurance that only covers property damage does not address the breadth of coverage necessary to