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Being Underinsured Might Cost Big Money


When you’re underinsured, you’re gambling with your financial future. When I was actively selling insurance, I would go through a comprehensive (or at least as comprehensive as the client would let me 🙂 ), checklist to make sure that the client had the right amount of protection.

This wasn’t always easy. I knew that the client frequently felt I was up-selling. But nothing could be further from the truth.

Recently, I came across an insurance claim that reminded me why I cared, why I went through my checklist, and why I continued to do this despite the fact some consumers may have felt I was being … well, an insurance salesman 🙁.

The insured in my story is not one of our clients, he is actually insured with a very large insurance company that uses captive insurance agents. In fact, this is not a California auto insurance story. Nonetheless, his story will serve as a good lesson for all of us. Because what happened to him, or what is going to happen to him, can and does happen every day.

A tale of the underinsured

OK already. The accident itself is not a dramatic story, it was a normal day, like any other, and the driver of a newer Mercedes made a mistake and failed to break in time and struck another car from behind.

Seems fairly routine.

What makes this claim different from the many property damage claims that occur daily is that the driver of the Mercedes didn’t hit any old car, he struck a Lamborghini. This was going to be anything but normal.

Things are not as they may seem on the surface

The exterior damage to the Lamborghini did not look too bad, however, when the insurance company for the Mercedes began to appraise the damage they determined that the loss was going to cost well more than $20,000, and so began the real problem.

The driver of the Mercedes only purchased $20,000 of property damage coverage.

Where was the extra money to repair the Lamborghini going to come from?

The insurance company for the driver of the Mercedes informed the owner of the Lamborghini that they didn’t have enough limit to repair his car and that he should go through his insurance company to have his vehicle repaired. So the money was going to come from the victim … or at least his insurance company.

This is where things start to get bad for the driver of the Mercedes.

When the claim was finally reported to the insurance company for the Lamborghini, they determined that the damage was, much more expensive than the $20,000 limit of the policy for the Mercedes, it was going to be $76,000. Now we’re talking real money!

Remember, the driver of the Mercedes only purchased $20,000 of property damage limit and now the loss is valued at $76,000.

The car has to be fixed, and the owner of the Lamborghini has the insurance, so a check is cut and the car is repaired.

But the story doesn’t end there.

What happens when you’re underinsured?

There isn’t one standard way insurance companies behave when the liable party is underinsured. It will likely be determined by several factors, but it is fair to say that most all insurance companies will assess how they act based on a simple cost-benefit analysis.

In our case, there is a $56,000 differential between the available property damage limit and the actual cost of the loss. This means it is in the insurance company’s best interest to pursue the driver of the Mercedes directly for the excess damages.

That’s right, the insurance company is going to ask the driver of the Mercedes for the $56,000, and if he doesn’t pay, they will sue him to get a judgment and secure an enforceable agreement for payment.

If the driver of the Mercedes doesn’t pay, they will report the judgment and default to the major credit reporting agencies.

Sure, the insurance company for the driver of the Mercedes will withhold the $20,000 payment of the policy limits in an attempt to secure a release of all future claims, but no insurance company is going to write off $56,000 if they can avoid it. Would you?

The insurance company of the Mercedes will not be able to withhold payment for long, at some point, they will have to honor their obligation to tender the limits, this means this still finds its way back to the driver of the Mercedes.

The driver of the Mercedes is in a bad situation.

Would you pay $56.00 to save $56,000?

The tragedy here is that paying for $100,000 of property damage protection likely would have only cost roughly $56.00 to $85.00 per 6-month term above what the driver of Mercedes paid to have $20,000 of coverage. Worst case, the appropriate protection would have cost an additional $14.00 per month. That’s less than a cup of coffee per day for a week.

Even if it can be rationalized that saving $85 per 6-six months or $170 per year to retain all risk for property damage losses that exceed $20,000, in this case, it would take 329 years to save enough money to make this strategy pay off.


Each time we make a choice to underinsure we are assuming the risk (or self-insuring) when we are liable for losses that exceed our limits. It’s cases just like this that compel insurance agents to advise our clients to consider purchasing the right amount of insurance. The cost isn’t always in the premiums, it in the financial ruin that you are avoiding by having the proper insurance.

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