What is 'underinsurance'?

Underinsurance refers specifically to a situation where the sum insured for a property is less than the actual cost required to repair or replace it in the event of a loss. This means that if a claim were to be made, the policyholder may receive significantly less compensation than needed to fully cover the damages or loss. As a result, the individual may have to bear the financial burden of the difference between the actual repair or replacement cost and the amount covered by the insurance policy.

The other options do not accurately define underinsurance. Not having any insurance coverage applies to being uninsured, while misestimating the property value during the application process could lead to underinsurance but is not the definition itself. Overestimating coverage for personal belongings implies having too much insurance, which is the opposite scenario of underinsurance. Therefore, the correct description of underinsurance is when the sum insured falls short of the actual repair or replacement costs needed.