What does "underinsurance" indicate?

• A. Excessive insurance coverage
• B. Insufficient insurance coverage for potential losses
• C. Insurance that expires before use
• D. Overvaluation of property

Answer: (B)

"Underinsurance" refers to a situation where an individual or entity holds an insurance policy that provides coverage insufficient to cover potential losses fully. This concept is crucial in risk management, as it can lead to significant financial gaps during a claim process. If the insured amount is lower than the actual value of the insured item or the potential losses that might occur, the policyholder may face considerable out-of-pocket expenses in the event of a loss. This inadequate coverage can occur for various reasons, such as failing to update policy limits in accordance with increasing property values or not accurately assessing the risks involved.

In contrast, the other provided options do not accurately reflect the meaning of "underinsurance." Excessive insurance coverage is the opposite issue that arises when one has more coverage than needed. Insurance that expires before use indicates a time-related issue, rather than coverage adequacy. Overvaluation of property deals with the estimated worth being inaccurately high, which is distinct from the level of coverage provided by an insurance policy. Thus, insufficient insurance coverage for potential losses is the correct description of underinsurance.