Underinsurance

What we do

In the case of underinsurance, the agreed insured sum is less than the insured value. By way of illustration: a car insurance policy may contain a clause stating that it covers damage up to a maximum amount or for a fixed sum. If the replacement value of the car is higher than the insured sum, this is referred to as underinsurance.

The consequence of underinsurance is that too little is paid out to replace or repair the insured item. The law provides for a number of rules regarding damage to property, such as cars and homes. The law states that an insured home is, in principle, insured at its reconstruction value. For a car, the replacement value serves as the starting point. Because these rules are not mandatory, the insurer may deviate from these starting points.

Organizations that use an insurance intermediary (insurance agent) can hold the intermediary liable for underinsurance. This is because, in many cases of underinsurance, the insurance agent acts in violation of the duty of care towards the client.

We have the experience and expertise to assume diverse roles, from advisory services to dispute resolution. We have an experienced team of lawyers and legal experts in insurance law. Contact us to discuss the possibilities.

What exactly is underinsurance from a legal perspective?

Underinsurance occurs when the insured sum is lower than the actual insured value of the interest. The insured sum is the amount for which you are insured and on which the premium is typically calculated; the insured value is the actual value of the asset, such as the reconstruction value of a building or the replacement value of inventory. If these two diverge to your disadvantage, you are underinsured. This applies to the baker on the corner with shop inventory that is insured too low, just as much as it does to an international group with an outdated valuation of a production site.

The principle of proportionality: Article 7:958 paragraph 5 of the Dutch Civil Code

The core of the problem with underinsurance lies in the principle of proportionality. Pursuant to Article 7:958, paragraph 5 of the Dutch Civil Code (BW), the insurer pays out only pro rata in the event of underinsurance. If a property is insured for €600,000 while the reconstruction value amounts to €800,000, this constitutes 75% coverage. In the event of damage of €100,000, the insurer will then, in principle, reimburse only €75,000. The justification is that the premium is usually determined based on the insured sum: those who insure too low pay too little premium, and this imbalance is corrected retrospectively through a proportionally lower payout. Incidentally, in the event of a total loss, no more than the insured sum is ever paid out.

Advance valuation and guarantee against underinsurance: Article 7:960 of the Dutch Civil Code

Underinsurance can be prevented. The strongest instrument is a pre-valuation by an expert pursuant to Article 7:960 of the Dutch Civil Code. The main rule of that article is the principle of indemnity: the insured may not be placed in a clearly more advantageous position as a result of the payout. However, there is an exception to this main rule when the value has been determined in advance by an expert (pre-valuation). That pre-determined value then applies between the parties, so that a claim based on underinsurance by the insurer is, in principle, excluded. In addition, many policies include a guarantee against underinsurance (for example, via a reconstruction value calculator), whereby the insurer waives the principle of proportionality as long as the policy conditions are met. We assess whether a pre-valuation or guarantee has been correctly agreed upon and is still valid.

How does underinsurance arise in practice?

Underinsurance often creeps in unnoticed. Common causes include an incorrect valuation (for example, an incorrect calculation of a building's volume in cubic meters), the uncritical adoption of outdated values ​​upon the acquisition of an insurance portfolio, price increases and rising construction costs during the policy term, and extensions or renovations that have not been reported to the insurer. Indexation of the insured sum covers only a portion of these risks. Periodic verification of the insured value against the actual value is therefore essential.

Duty of care of the insurance intermediary in case of underinsurance

If you suffer a shortfall due to underinsurance, the matter does not necessarily have to end with the insurer. The insurance intermediary (insurance agent) has an extensive duty of care and must specifically guard against underinsurance. This duty of care includes collecting accurate information, periodically verifying the insured replacement value against the actual value, and explicitly warning of the consequences of underinsurance. An intermediary who merely advises having a valuation carried out but does not actively follow up to ensure that the valuation actually takes place falls short. For instance, the Amsterdam Court of Appeal ruled (February 25, 2014, ECLI:NL:GHAMS:2014:569) that the intermediary, as a specialist, had failed to adequately safeguard the interests entrusted to him. If the intermediary falls short, he can be held liable for the unpaid damages.

What MKB Juristen does for you regarding underinsurance

Our mixed teams of lawyers and in-house counsel support you at every stage. We review your policy and valuations, assess whether the insurer is legitimately invoking the principle of proportionality, and conduct negotiations or proceedings with the insurer on your behalf. If the process stalls, we investigate whether the insurance intermediary has breached their duty of care and, if necessary, hold them liable. Whether you are the baker on the corner or an international corporation, we translate insurance law into a concrete strategy to ensure you receive compensation for your damages.

Frequently asked questions about underinsurance

What happens if I am underinsured? The insurer pays out pro rata pursuant to Article 7:958, paragraph 5 of the Dutch Civil Code. In the event of partial damage, you will then receive a proportionally lower compensation.

Can I prevent underinsurance? Yes, through a preliminary valuation by an expert (Article 7:960 of the Dutch Civil Code) or a guarantee against underinsurance in the policy. Periodic review of the value remains necessary in this regard.

Can I hold my intermediary liable? Often, yes. The insurance intermediary has a duty of care to guard against underinsurance and may be liable for unpaid damages in the event of a breach.

Part of our expertise in Insurance Law

Underinsurance is one of the topics within our broad expertise in Insurance Law. Based on this expertise, we handle disputes regarding benefits, policy conditions, and the duty of care of insurers and intermediaries. Contact us to discuss your situation without obligation.