Being "underinsured" means a person has insurance coverage, but the limits may not be high enough to cover the full expenses of a claim.

For example, each state requires auto liability coverage and sets minimum limits that drivers must purchase. To save money on auto insurance premiums, a driver might choose to purchase a policy with the minimum coverage limits.

If you cause an accident, however, the minimum liability coverage limits might not be enough to pay for all the damage. In that case, you may have to pay out of pocket for charges that exceed your coverage limits. Think about the following situations:

If the other driver suffers severe injuries in the accident
If multiple passengers in the other vehicle are injured in the accident
If injuries cause the other driver or passengers to miss work for a prolonged time
If the other driver's vehicle is significantly damaged or totaled
If there is additional property damage beyond the other driver's vehicle

As you select auto insurance coverage, remember that minimum liability limits are just a starting point. By increasing your limits, you may be able to reduce out-of-pocket expenses after an accident.