Underinsurance is one of the most serious and widespread problems in Australian insurance. It occurs when the sum insured on a policy is less than the actual cost to replace or rebuild what is being covered. When a claim is made, the insurer only pays out proportionally — meaning you bear the shortfall yourself, often at the worst possible time.

How Common Is Underinsurance in Australia?

Research consistently shows that a significant proportion of Australian homes, businesses, and strata properties are underinsured. In the aftermath of major disasters — including the 2019-20 bushfires and the 2022 floods — thousands of Australians discovered their insurance would not cover the full cost of rebuilding, leaving them with devastating financial shortfalls.

Why Does Underinsurance Happen?

There are several common reasons why businesses and property owners end up underinsured:

• Setting the sum insured too low to reduce premiums — a short-term saving that creates enormous long-term risk.
• Failing to update sums insured — not accounting for inflation, rising construction costs, or improvements made to a property.
• Using market value instead of replacement cost — the market value of a property is very different from the cost to rebuild it from scratch.
• Overlooking items — forgetting to include certain assets, improvements, or liabilities in the sum insured.

The Underinsurance Penalty: How It Works

Many insurance policies include a co-insurance or average clause, which proportionally reduces your claim payout if your sum insured is less than the required amount. For example, if your building is insured for $500,000 but should be insured for $1,000,000, a claim of $200,000 may only be paid out at 50% — leaving you to fund the remaining $100,000 yourself.

How to Avoid Underinsurance

The most reliable way to avoid underinsurance is to work with a professional insurance broker and, where applicable, have your property or assets professionally valued. At HC Insurance, we review sums insured with our clients regularly to ensure their cover keeps pace with rising costs. We also help clients understand the difference between indemnity value and replacement value, and ensure their policies reflect the correct basis of settlement.

Do not wait until you need to make a claim to discover you are underinsured. Contact HC Insurance today for a review of your current coverage and peace of mind that you are properly protected.