Many individuals and business owners believe they are adequately protected—until they need to make a claim.
Underinsurance is one of the most common and costly mistakes when it comes to general insurance, and it often only becomes apparent at the worst possible time: after a loss has occurred.
What is Underinsurance?
Underinsurance occurs when the level of cover you have in place is less than the true replacement or repair cost of your asset. This can apply to your home, contents, business premises, equipment, or even stock. In simple terms, if your policy does not fully cover the cost to rebuild, repair, or replace what you’ve lost, you are underinsured.
What Happens When You Make a Claim?
This is where things can become confronting. Many policies include what is known as an “average clause.” This means that if you are underinsured, the insurer may reduce your claim payout proportionally.
For example, if your property is insured for $500,000 but the actual replacement cost is $1,000,000, you are effectively insured for only 50% of its value. If you then suffer a partial loss—say $200,000 worth of damage—the insurer may only pay $100,000. You are left to cover the shortfall.
In the case of a total loss, the consequences can be even more severe. You may receive the full sum insured, but it still won’t be enough to rebuild or replace what you had. This can place significant financial strain on individuals, families, and businesses, sometimes leading to long-term setbacks or even insolvency.
Why Does Underinsurance Happen?
Underinsurance is often unintentional. It can result from:
- Outdated valuations that haven’t kept pace with rising construction or replacement costs
- Efforts to reduce premiums by selecting a lower sum insured
- Misunderstanding what needs to be included (e.g. demolition, professional fees, compliance costs)
- Failing to account for inflation or changes to the property or business over time
How Can You Check Your Insurance Levels?
The good news is that underinsurance can be avoided with regular review and the right advice. Here are some practical steps:
- Conduct Regular Valuations
Ensure your assets are valued accurately and updated regularly. For property, consider professional rebuilding cost estimates rather than relying on market value. - Review Your Policy Annually
Your circumstances change over time. Renovations, new purchases, or business growth can all impact the level of cover required. - Understand What’s Included
Look beyond the headline sum insured. Consider additional costs such as debris removal, architect fees, and compliance with updated building codes. - Factor in Inflation
Construction and replacement costs can rise quickly. Ensure your policy accounts for this, either through indexation or manual adjustments. - Speak With a broker or adviser
Perhaps the most important step is to seek advice. A general insurance broker or adviser can help you assess your risks, calculate appropriate cover levels, and explain policy conditions such as average clauses.
The Role of Advice
Insurance is not just about having a policy—it’s about having the right policy, structured correctly. Underinsurance can undermine even the best intentions, leaving you exposed when you need protection the most.
Seeking professional advice ensures that your cover aligns with your real-world risks and financial position. It provides peace of mind knowing that if the unexpected happens, you are properly protected.
General Advice Warning: This article provides general information only and does not take into account your personal objectives, financial situation, or needs. You should consider whether this information is appropriate for you and seek professional advice before making any decisions regarding insurance.
If this article has inspired you to think about your unique situation and, more importantly, what you and your family are going through right now, please get in touch with your advice professional.
This information does not consider any person’s objectives, financial situation, or needs. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation, or needs.
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Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Please consider whether the information is appropriate to your circumstance before acting on it and, where appropriate, seek professional advice.