Underinsurance is a widespread issue in Australia, leaving many homeowners and businesses struggling to restore their standard of living after significant damage or loss. If your insurance doesn’t fully cover the cost of rebuilding, replacing property, or recovering from a disaster, you may face unexpected financial burdens.
What is Underinsurance?
Underinsurance occurs when your insurance cover is insufficient to meet the actual replacement or repair costs, leaving you responsible for the shortfall. This can impact both individuals and businesses, affecting cash flow, operations, and long-term viability.
Signs Your Business or Home May Be Underinsured
- You haven’t reassessed your insurance in over 12 months – Business growth, home upgrades, and market changes like rising building costs or new regulations can leave you underinsured if your coverage isn’t updated regularly.
- Your coverage is based on affordability rather than actual replacement costs – While managing cash flow is important, opting for minimal coverage or disregarding insurance for events perceived as ‘low frequency’ can lead to financial strain when disaster strikes.
- You’ve upgraded your home, business, or equipment – Whether it’s renovations, new assets, or moving to a larger space, changes in value and risk exposure mean your policy needs to be adjusted.
How to Stay Protected
The best way to avoid underinsurance is to regularly review and accurately calculate the value of your assets. Take stock of your belongings, use insurance calculators, and update your policy whenever you make upgrades. Speak to an insurance expert to ensure your coverage aligns with your current needs and financial protection goals.
Stay informed and ensure you’re covered—because the right insurance can make all the difference when you need it most.
Helpful Resources
Some helpful calculators for domestic insurance can be found here:
Further articles outlining this issue:
- Australian homeowners at risk of underinsurance – report | Insurance Business Australia
- Understanding Underinsurance in Business: Pitfalls, Signs, and Solutions | Allianz Australia
- The risk of underinsurance – Insurance Council of Australia
Where Underinsurance Can Be an Unexpected Issue
An interesting scenario that a lot of people do not consider is the implications this may have on other losses that may not be a total loss. Often, roofing claims are an area where underinsurance may be applied if the sum insured is not sufficient, with the insurer potentially only paying the portion of the loss for which you are insured.
There have also been cases where damage was caused by the impact of a motor vehicle where recovery was not available. This could be due to the vehicle being stolen or the driver having a medical episode, with legislation in place preventing recovery in such scenarios.
The insurer then has the ability to review the entire value of the building, contents, and stock to determine if the sum insured is adequate. The underinsurance clause has been used in these scenarios, leaving the insured well short of covering their losses with no other avenues for recovery.
An outline of such a scenario can be found here:
Information on Blameless & Inevitable Motor Vehicle accidents can be found here:
- Blameless And Inevitable Car Accidents – PK Simpson
- Inevitable Accident Claims: A Brief Overview for Motor Insurance Claims Officers – Ligeti Partners
Underinsurance Clause
While becoming less common for household policies, the vast majority of commercial insurance products will have an underinsurance clause within the wording.
An underinsurance clause is basically a rule in insurance that says:
If you insure something (like your commercial building) for less than its true value, you might not get the full payout when you make a claim.
For example:
- Your building is worth $500,000, but you only insure it for $300,000 (60%).
- A fire causes $200,000 in damage.
- Because you were underinsured, the insurer might only pay a portion of your claim instead of the full $200,000. They may only be required to pay 60% of the loss ($120,000), leaving you out of pocket by $80,000.
This happens because many policies have an underinsurance penalty, meaning they reduce payouts if you don’t insure for at least a certain percentage (usually 80%) of the actual value.
Moral of the story? Make sure your insurance covers the real value of what you’re insuring, or you could be out of pocket!