In a New House Insurance post I explained how easy it is to under insure a property so here is an explanation of what can happen with an under insured property.
Let’s you insure your new house for what you paid the builder, say $200,000.
Total Loss
In the case of a total loss, yes, you get $200,000, but you will need to meet demolition costs and all the other issues mentioned in New House Insurance say $300,000.
Partial Loss
But what about if part of your home is damaged?
Say it would cost $100,000 to repair the damage, but the insurer isn’t going to pay $100,000 to repair the house, – they’ll calculate that you were only 66% insured, and only pay out $66,000. Leaving you to find $34,000.
What can make this worse is that insurers aren’t obliged to pay out the cash! . . . they may embargo the $66,000 until you’ve come up with the rest of the money.
Major Under Insurance
If you are really under insured there is a risk that the insurer will argue that you’ve deliberately under-insured and your policy is void.