Final answer:
Underinsured motorist coverage is part of an auto insurance policy that protects a policyholder from incurring major out-of-pocket expenses when the at-fault party does not have enough insurance to cover all damages. It addresses the risk of underinsurance, ensuring that individuals do not pay a disproportionally large percentage of their income on losses from an accident. The coverage aligns with the principles of coinsurance and the fundamental law of insurance.
Step-by-step explanation:
Understanding Underinsured Motorist Coverage
​Underinsured motorist coverage is a part of an auto insurance policy that provides compensation to a policyholder when an at-fault driver does not have sufficient insurance to cover the damages they have caused. This coverage is especially important when the cost of medical expenses, property damage, or other losses exceed the at-fault driver's liability limits. For instance, if you are involved in an accident where the other party is at fault and they only have minimal liability coverage, your underinsured motorist coverage can help pay for your losses that are not covered by the at-fault party's insurance.
In some cases, people having some insurance may mask the fact that they could be underinsured. This means that if you solely rely on the at-fault party's insurance, you could end up paying out-of-pocket for anything over their policy limits. This is where your underinsured motorist coverage comes into play, as it helps to bridge that gap. In fact, some people may end up paying at least 10 percent of their income on healthcare costs not covered by insurance, which can create financial strain.
The concept of insurance is based on coinsurance, where the policyholder and the insurance company share the costs of a loss. Underinsured motorist coverage functions in a similar manner, stepping in when the at-fault party's coverage is insufficient. The principle behind this is that individuals share the risk by paying premiums, and those who incur losses receive compensation, in line with the fundamental law of insurance. The idea is to ensure that the average amount paid in premiums is proportional to the average benefits received, thereby maintaining a balance and avoiding situations where an individual is left underprotected and bearing significant financial burden from an event caused by another party.