Determination of the amount to be paid against a claim in the case the amount or sum insured is undervalued under the policy. If a partial loss occurs, the payment against a claim will be determined in a proportion identical to the shortfall- i.e., the value of the underinsurance. In other words, if the sum insured is less than the level it should be, the insured will not receive a full coverage for any loss under the respective policy. In the event an insured’s property is underinsured, the condition of average will operate to the effect of lowering the net amount payable for a valid claim, pro rata to the amount of underinsurance.
For example, if the sum insured constitutes only 40% of the level of full coverage, the insured will only receive 40% of any valid claim.
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