What is Underinsurance and Why It Matters

Underinsurance means that the sum insured on your policy does not reflect the true replacement value of your home, contents, business assets or gross profits.

This can leave you out of pocket and financially exposed in an event of a claim – often only discovered when it’s too late.

 

Why Underinsurance Happens

There are several common reasons an individual or entity may find themselves underinsured:

  • Outdated Valuations:                    Not reviewing the insured value of your assets regularly can result in a significant shortfall, especially in a rapidly changing market.
  • Inflation & Rising Costs:                Construction costs, materials, and labour prices continue to rise.
  • Unreported Renovations:             Home or business improvements, extensions, or upgrades may not be covered unless disclosed to your insurer.
  • Deliberate Understatement:       Some policyholders underinsure to save on premiums, not realising the impact this has on claims payouts.
  • Inaccurate Asset Lists:                   Personal belongings, machinery, or business equipment may not be fully accounted for or valued correctly.

 

The Financial Risk

Underinsurance can drastically reduce your payout under what’s known as the “co-insurance” or “average” clause.
In line with this clause, the insurer will reduce the claim in proportion to the level of underinsurance.

Example:

If your building is insured for $1 million but costs $4 million to replace, you’re only insured for 25% of its value.
In the event of a partial loss of $400,000, the insurer may only pay 25% ($100,000) — leaving you responsible for the remaining $300,000.

 

How to Avoid Underinsurance

Avoiding underinsurance isn’t difficult—but it does require regular attention:

  • Get Professional Valuations:        Ensure your home, business premises, and contents are accurately valued by qualified professionals.
  • Review Your Policy Annually:      Life changes, and so do your insurance needs. Regular reviews help keep your cover up to date.
  • Use Online Calculators:                Tools provided by insurers, or the Insurance Council of Australia, can help estimate your replacement costs.
  • Disclose Changes Promptly:        Always let your broker know about significant upgrades, renovations, or purchases.
  • Work with a Broker:                      Insurance brokers can help identify gaps in cover and recommend the right level of protection for your needs.

Helpful links

Below are a summary of online resources that can be utilised to provide an indication on adequate sums insured

 

Building Replacement Value Report        Please click here and you will be directed to our registration page, in collaboration with highly skilled Quantity Surveyors who specialise in construction cost analysis.

Cordell Calculator for Buildings                 https://sumsure.cordell.com.au/#/products/7/profiles/141

Circa Net Calculator for Contents             https://homecontents.com.au/index.php?c=web_intro&profile=ica_circa2