What term is used when calculating a claim payout for an undervalued insured policy?

The term that refers to the calculation of a claim payout for an undervalued insured policy is "condition of average." This principle applies in situations where the policyholder has insured their property for less than its actual value. According to the condition of average, if a claim is made, the payout will be reduced proportionally to reflect the amount that the property was underinsured.

For example, if a property worth $100,000 is only insured for $70,000 and sustains damage, the insurer may pay only a portion of the claim that corresponds to the percentage of the insurance coverage relative to the property's actual value. This encourages policyholders to insure their property closer to its actual value, as underinsuring can lead to reduced payouts in the event of a loss.

The other options—fair market value, depreciation factor, and replacement value—while related to property insurance and claims, do not specifically address the concept of proportional reduction due to underinsurance in the same manner. Fair market value refers to the price that a property would sell for in an open market, depreciation factor accounts for the loss of value over time, and replacement value focuses on the cost to replace an insured item with a new one without factoring in depreciation.