What does underinsurance refer to in auto insurance?

Underinsurance refers to having insufficient coverage to fully address the damage or liability resulting from a claim. In the context of auto insurance, this often means that the policy limits are lower than the costs associated with an accident, injury, or property damage. For example, if an insured driver has minimal liability limits and causes an accident exceeding those limits, they may find themselves financially responsible for the excess amount beyond what their policy covers. This situation can lead to significant out-of-pocket expenses for the insured, which is why it's important for drivers to ensure that their coverage is adequate for their circumstances and potential risks on the road.

The other options do not accurately represent the concept of underinsurance. Having excessive coverage for minor accidents would not indicate underinsurance but rather a situation of overinsurance. Being uninsured for all types of incidents describes a lack of insurance coverage entirely, rather than underinsurance. Low premiums due to good driving refers to potential discounts or rewards for safe driving habits, which relates to costs associated with the policy rather than the adequacy of coverage provided.