A situation that arises when the sum insured on an insurance policy — that is, the maximum coverage amount for a claim — falls short of covering the full amount required for fixing insurable damages (such as, costs of rebuilding, repairing or replacing an insured home, etc.)

Broadly speaking, underinsurance occurs when a policy does not fully cover full financial protection for the insured (full costs of reinstatement or replacement). The policy, in such a case, is described as insufficient or inadequate. If the sum insured is less than the level it should be, the insured will not receive a full coverage for any loss under the respective policy. In the event an insured’s property is underinsured, the condition of average will operate to the effect of lowering the net amount payable for a valid claim, pro rata to the amount of underinsurance.

Underinsurance is also referred to as an average clause, condition of average or co-insurance.