What is implied if a client does not take out cover for the full value of the item being insured?

When a client chooses not to insure an item for its full value, it implies that in the event of a claim, the insurer may only pay out a portion of the value of the item rather than the entire amount. This is primarily due to the principle of indemnity in insurance, which states that a policyholder should not profit from a loss. By underinsuring, the client bears part of the risk and assumes that any claim will only be compensated according to the level of coverage purchased.

Insurers often use a concept known as average, which allows them to proportionately reduce a claim based on the ratio of the insured value to the actual value of the item. Therefore, if the item is worth, for example, $10,000 but only insured for $7,000, any claim paid out would be adjusted accordingly. This system helps encourage clients to fully insure their valuables to avoid potential financial shortfalls when a loss occurs.