What Is Insurance Under-Insured and the Critical Risk of It 2023

Have you ever heard of insurance under-insured? Being under-insured means that an individual or entity has insurance coverage that is insufficient to fully protect them from potential financial losses in the event of an accident, injury, or damage.

How Bad is Insurance Under-Insured ?

When you renew a car and it is underinsured, they may face significant out-of-pocket expenses beyond what their insurance policy will cover. This can leave them vulnerable to financial hardships, as they may be responsible for paying for damages or liabilities that exceed their policy limits.

For example, you own a Brand A car that worth RM313,888 but you purchased insurance coverage at the value (Sum Insured) of a Brand B car that worth RM46,500. That means, if anything unfortunate happens to your car, you’ll only be getting compensation at the value of a Brand B car or even a lesser amount!

The example provided above explains what insurance under-insured is. In simple terms, under insurance refers to a situation where the value of insurance coverage is lower than the actual market value of the property being insured, such as a car.

In the event of an accident, theft, or fire, the compensation amount received will not only be less than the current market value of the car but also lower than the amount for which you have insured the car when renewing your insurance policy.

Risk of Car Under-Insured

When you purchase an insurance under-insured, your car can expose you to various risks and financial consequences. One primary risk is the inadequate coverage in the event of an accident or theft. If your car is under-insured, the insurance payout may not be sufficient to cover the full cost of repairs or replacement, leaving you with significant out-of-pocket expenses.

This can lead to a major financial burden and potential difficulties in getting back on the road.Additionally, in the unfortunate event of a total loss, such as a severe accident or fire, the compensation received will likely fall short of your car’s actual market value, leaving you without the necessary funds to replace your vehicle adequately.

It is crucial to ensure that your car insurance coverage adequately reflects the value of your vehicle and potential risks to protect yourself from these potential risks.

The Calculation of Average Clause

Let’s refer to a car accident case. When you first bought your car, its market value was RM80,000. But you’ve under-insured your car for RM60,000. A year later, you get into an accident and needed to claim from your comprehensive policy. The amount needed to cover the damage was RM20,000 but at the time of the claim, the market value of your car is RM75,000.

Because of the insurance under-insured purchase, the “average clause” applies. Below is the formula of the Average Clause: Under Insured Sum / Car Market Value When Claimed x Actual Cost of Damage.

So with the average clause in place, you can only claim RM16,000 instead of the actual loss of RM20,000. With a shortfall of RM4,000, you’ll have to use your own money to settle the difference!

Check Your Car’s Market Value and Protect Your Car with Qoala

When applying for insurance online, the majority of insurance websites will automatically determine your vehicle’s market value. Nevertheless, you have the option to utilize alternative websites to assess your car’s market value. Simply enter your car’s brand, model, year of manufacture, engine details, transmission type, and variant to obtain the information you need.

Having understood the potential hazards of taking insurance under-insured, it is essential to safeguard yourself and your car by obtaining the appropriate coverage. If you are currently seeking car insurance, take the initiative to compare different options and select the one that suits your needs best. Start your search for the best car insurance today and ensure the protection you deserve.

As a leading platform for insurance comparison and renewal, Qoala is dedicated to helping you to find the best car insurance policy. Its allows you to compare car insurance and select affordable car insurance that meets your specific requirements and provides the necessary protection from several top insurance companies.