Insurance Explained: Underinsurance

Blue banner with text: Insurance Explained: Underinsurance


When we hears stories of uninsured people affected by bushfires, floods or other natural disasters, it's natural to have mixed feelings - sorry for their plight but at the same time, incredulous that they were not adequately insured. What's equally surprising is the number of people with insurance that find themselves underinsured when it's time to make a claim, receiving considerably less than the actual loss suffered.

Underinsurance is not just limited to home or health insurance. If you have insurance for your business, you have the potential to be underinsured too. Given the impact underinsurance can have on your business, livelihood and family, it's important to know what it is and how it can affect you.

Simply speaking, underinsurance means that if you make an insurance claim, your payout may not cover the full replacement value of what has been insured. This usually happens if you have nominated an insufficient sum insured or value to cover the loss or damage of whatever you're insuring.

It's also possible to inadvertently become underinsured (which can make it harder to accept at claim time) and therefore it's important to know for to avoid it.


Three common ways you could find yourself underinsured

Set and forget your insurance

Business insurance is not something that can be neglected year after year - it should be actively and regularly renewed, so that any changes that may have occurred in the past 12 months are taken into consideration. These changes may include:

  • Purchase of any new furniture and equipment
  • Changes in business activity, such as providing new services
  • Abnormal events with considerable impact to turnover
  • Major installations or upgrades to pieces of equipment or technologies
  • Alterations to capital investments such as office fit-outs
  • New employees joining or changes in operating processes
  • Changes in risk factors impacting your business' exposure to various claims and liabilities

Insurance premium affordability

Some business owners are willing to pay less to keep premium costs down, however if affordability is an issue, an insurance specialist can assist with your insurance budgeting and funding to help avoid underinsurance. 

Some insurance policies include a clause known as the 'Average' or 'Co-Insurance' clause. If a policy does have this clause and you are underinsured, it could result in any potential claim being only partly paid, as shown below.

Co-Insurance clause applied to claim

Actual replacement value of your contents $500,000
Your nominated contents sum insured $300,000
% of Actual Replacement Value insured 60%
Insurance claim - value of damaged contents $70,000
Amount payable by insurer after the clause is applied (60%) $42,000


Increased cost of building

If the insured value of your building is based on an outdated and historical valuation, today's rising costs and more stringent regulations are likely to leave you considerably underinsured.


Avoiding underinsurance is the name of the game

Being proactive and prepared for the worst helps you maintain control. It is vital that your business continuity plan incorporates your insurance. With bushfires, hailstorms and a pandemic, 2020 has shown the many and unpredictable risks that can severely impact or disrupt your practice. "It'll never happen," is a statement that we can confidently leave behind.

Our Relationship Managers can help you avoid being underinsured. After getting to know you and your business' situation, they will provide guidance on preventative measures. Although insurance brokers are not valuers, they can offer advice on how to calculate an adequate replacement value. Plus, they can also identify if your policy has the 'Average' or 'Co-Insurance' clause. 

An annual review of your business' insurances by our Relationship Managers that considers all of the above will help you avoid costly mistakes - mistakes that may not be as easily avoided when buying insurance online or directly from an insurance company. 


To speak to a Relationship Manager about your insurances and how we can help you avoid underinsurance, call us today on 1300 305 834 or email us at 


Our advice is general in nature. To read the full General Advice Warning click here.





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