What would happen if my house is underinsured?

Many people try to save insurance premium by under-insuring their house. But, they do not know that by doing so, if something happens to the house, the insurance company will not pay them the total amount claimed for the loss.

If the amount of insurance is less than 80% of the value of the insured property, the insurer can apply the 'average clause' and pay the insurance owner less than the total amount.

For example:
Mr Wong has insured his home worth a market price of RM200,000 for only RM150,000, which is only 75% of the house's value. The house was partially destroyed by fire and the loss is estimated to be RM80,000. In this case, the claims paid would be:

RM150,000/RM200,000 x RM80,000 = RM60,000.

Had Mr. Wong insured the house to the market value, he would be able to claim RM80,000, possibly he does not have to use his own saving of RM20,000 to repair his house, because he gets paid only RM60,000 of what he loss.