When people think about insuring a home, they often begin with the market value of the property. If a Mumbai flat is worth ₹1.5 crore, they may assume the insurance amount should also be ₹1.5 crore.

But property insurance may focus on the reconstruction value of the building and the value of insured contents, rather than the land value or resale price of the property.

What Is Underinsurance in Home Insurance?

Underinsurance occurs when property is insured for less than the value that should have been declared under the applicable policy basis.

Depending on the policy, this can affect claim settlement.

Important concepts include:

• Building reconstruction value
• Contents value
• Replacement cost
• Depreciated value, where applicable
• Sum insured adequacy
• Average or underinsurance conditions

Simplified definition: Underinsurance means choosing a sum insured that is too low for the property value that the policy is meant to cover.

Why Is Market Value Different From Insurance Value?

A home's market price can include:

• Land value
• Location premium
• Demand for the neighbourhood
• Society amenities
• Future redevelopment expectations

Insurance of the building generally concerns the financial cost of repairing or reconstructing insured physical property, subject to the policy basis.

Key points to check

Ask:

• Is the building insured on reconstruction value?
• Are interiors included?
• Are furniture and appliances separately covered?
• How should contents be valued?
• Does an underinsurance condition apply?
• Should the sum insured be reviewed after renovation?

How Can Underinsurance Affect a Partial Claim?

Depending on the policy wording, underinsurance can sometimes affect even a partial loss.

If the property should have been insured for ₹40 lakh but was insured for only ₹20 lakh, the policyholder has insured only part of the relevant value.

A proportional claim condition may then apply if stated in the policy.

Illustrative Policy Wording

The following is fictional:

“Where the declared sum insured is lower than the value required under the policy basis, claim settlement may be reduced proportionately in accordance with the underinsurance condition.”

This is illustrative wording only.

Check:

• How property value must be calculated
• Whether average applies
• Whether any waiver threshold exists
• How renovations are treated
• Whether contents require separate values
• Whether valuable items require declaration

Example, How It Works

Suppose:

• Correct insurable value: ₹40 lakh
• Declared sum insured: ₹20 lakh
• Insured proportion: 50%
• Eligible fire damage: ₹10 lakh

If a proportional underinsurance condition applies, the simplified calculation may be:

• Eligible damage: ₹10 lakh
• Insured proportion: 50%
• Potential claim before other deductions: ₹5 lakh

The policyholder may need to bear the remaining amount.

Actual treatment depends entirely on the policy wording.

The Practical Takeaway

Do not insure a home by simply copying its purchase price or current resale value.

Work out what the policy is intended to insure: building reconstruction, interiors, contents or a combination of these. Review the values after major renovation or significant purchases.

Coverage, exclusions, limits and claim requirements vary by insurer and policy. Read the customer information sheet and complete policy wording before buying or renewing.