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Insurance 101
What is Underinsurance in Car Insurance?
Written by Richard Ramdwar
C.I.P., M.S.T.I, A.C.I.I
Managing Director of Nautica Insurance brokers and creator of Starfish.
When it comes to insuring your motor vehicle, many people focus solely on finding the cheapest premium, often overlooking a crucial aspect of coverage that is “THE ACTUAL MARKET VALUE OF YOUR CAR”. While opting for lower coverage might save you money in the short term, underinsuring the value of your car can have significant financial consequences if something goes wrong. One of the biggest risks the reduced payout you receive in the event of a claim.
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In this blog post, we’ll explain what underinsurance is, how it applies to motor car insurance.
What is Underinsurance?
Underinsurance occurs when the insured value of your motor vehicle is less than its actual value. This can happen for a variety of reasons:
- Misunderstanding the Value of Your Vehicle
You may not have taken the time to accurately assess the current market value of your car.​
- Depreciation Over Time
Your car’s value will decrease, and you may have chosen a lower insured value to reduce your premium.
- Cost Saving Measures
In an effort to save on premiums, some policyholders choose to insure their vehicle for less than its real value.
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While underinsuring your car might initially seem like a way to cut costs, it can leave you vulnerable to financial losses when it’s time to make a claim.
How does Underinsurance Work in Motor Car Insurance?
Motor car insurance policies generally cover your vehicle for either its **current replacement /market value** (the amount your car would be worth if sold) or its **agreed value** (a specific value agreed upon by you and your insurer). When you insure your car, the amount of coverage should reflect what it would cost to replace or repair your vehicle in case of damage or loss.
Why Underinsurance is Risky
Underinsuring your motor vehicle may seem like a cost-effective strategy, but the penalty of average can end up costing you much more in the event of a claim. Here’s why it’s a risky move:
Reduced Claims Payout
If your car is seriously damaged or stolen, the financial burden of underinsurance could be overwhelming.
Higher Out-Of-Pocket Costs
When your car is underinsured, you are essentially agreeing to take on a portion of the risk yourself. This means that in the event of a claim, you’ll have to cover the difference between what the insurer pays and the actual cost of repairs or replacement.
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Inadequate Coverage
If your vehicle is a total loss, such as in the case of theft or a major accident, the payout from an underinsured policy might not be enough to replace your vehicle with a comparable one. You may be forced to settle for a lower-value car or incur additional expenses to buy a new vehicle.
How to Avoid Underinsurance
To avoid the risks and financial pitfalls of underinsurance, it’s important to:
- Assess Your Car's Value Accurately
Make sure the insured value of your vehicle reflects its current market value. You can do this by checking industry guides, dealership prices, or getting a professional valuation. (We enclosed a list below).
- Review Your Policy Regularly
Vehicles depreciate over time, and changes in the car’s condition, modifications, or the current market value should be reflected in your coverage. It’s a good idea to review your policy at least once a year.
- Consider Comprehensive Coverage
Rather than skimping on coverage to save a few dollars on our premium, consider getting comprehensive coverage that reflects your car's actual value. This will protect you from significant financial losses in the event of a claim.
CONCLUSION: PROTECT YOURSELF FROM UNDERINSURANCE
Underinsuring your car might seem like a quick way to reduce your insurance premiums, but the potential cost of underinsurance and the application of the penalty of average can lead to severe financial consequences. To ensure that you’re adequately covered, always insure your vehicle for its true market value and review your policy regularly.
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Contact our Team at Nautica to obtain the best terms for your motor insurance at a price that is affordable to you. We can advise on the value of your car and find the best policy to suit your needs.
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We enclose a list of insurer approved motor valuators. Note we have no affiliation to these companies and enclose for your ease of reference only.
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Cariclaims Investigators & Adjusters Limited
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General Adjusters Limited
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Motor Critic Limited
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Oliver Rosemin and Co Ltd
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Pioneer Claims Services Co Ltd
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Twin Isle Adjusters Ltd