What happens if a property is underinsured at the time of a loss?

When a property is underinsured at the time of a loss, the payout may be reduced based on the percentage of underinsurance. This means that if the insurance coverage is less than the value of the property, the insurer will calculate the claim payment based on the insured amount relative to the property's actual value. For example, if a property is worth $300,000 but only insured for $200,000, and a loss occurs that amounts to $100,000, the insurer may only pay out a proportionate amount based on the ratio of coverage. In this case, the payout would likely be two-thirds of the loss amount, which accounts for the amount of insurance in place relative to the total property value.

This mechanism is designed to encourage policyholders to obtain sufficient coverage and to reflect the principle of indemnity in insurance: to compensate for lost property without allowing the insured to profit from the situation.