It means having insurance coverage but the limits may not be high enough (inadequate) to cover the full expense of a claim. Every state has minimum liability coverage for property damage and bodily injury in order to permit/register a vehicle on the road. These minimums, however, are typically not sufficient enough to cover the costs of repair or medical injury. In such cases you may have to pay out of pocket to cover the difference between the limits of coverage and the actual claim.
Even worse if the other party decides to sue the limits will be used for defense costs instead of repayment making you possibly liable for more. While underinsurance may result in lower premiums the loss arising from a claim may far exceed any marginal savings.
