Insurance is designed to help protect the assets and lifestyle you have worked hard to build. However, having an insurance policy does not automatically mean the amount of cover is adequate. Underinsurance occurs when the sum insured is lower than the actual cost of repairing, rebuilding or replacing the insured property.

Unfortunately, many people only discover they are underinsured when they make a claim.

What can happen at claim time?

If your home, business premises or contents are badly damaged, the cost of recovery may be much higher than the amount listed on your policy. This can leave you responsible for funding the difference from your savings, taking on debt or changing the scope of the repairs.

Some policies may also include an underinsurance or co-insurance clause. Depending on the policy wording, this may allow the insurer to reduce a claim payment when an asset has been insured for less than its full replacement value. A partial loss could therefore result in a reduced payment, not just a total loss.

For example, a property may be insured for $600,000 but cost $800,000 to rebuild. If a major storm causes $200,000 of damage, the claim payment may be affected by the property being insured for only 75 per cent of its replacement value. Policy terms differ, which is why professional advice and a clear understanding of the policy are important.

How underinsurance can begin

Underinsurance is not always caused by deliberately choosing a lower level of cover. It can develop gradually as property values, building costs, labour expenses and the price of materials increase.

A change in personal or business circumstances can also create a gap. Renovations are a common example. Adding a room, upgrading a kitchen, building a deck, installing a pool or improving outdoor areas may significantly increase the cost of rebuilding the home.

The same applies to contents. New furniture, appliances, jewellery, technology, sporting equipment or collectables can increase the value inside the property. Business owners may also purchase additional machinery, stock, tools, computers or office equipment without updating their cover.

Tips for conducting a sum insured check

Start by reviewing the sum insured shown on your current policy schedule. Ask yourself whether that amount reflects today’s replacement or rebuilding cost, rather than the original purchase price or market value.

For buildings, consider using a reputable rebuilding cost calculator as an initial guide. Include demolition, debris removal, professional fees, council requirements, temporary accommodation, labour, materials and changes to building standards. Complex homes, older properties and buildings in regional locations may require a professional valuation or quantity surveyor.

For contents, complete a room-by-room inventory. Include items stored in cupboards, sheds, garages and outdoor entertaining areas. Photographs, receipts and videos can help create a useful record. Pay particular attention to high-value items that may have policy limits or require separate listing.

Business owners should review property, stock, equipment, plant, machinery and potential business interruption periods. The time required to rebuild, replace equipment and return to normal operations may be longer than expected.

A sum insured check should also be completed after renovations, major purchases, business expansion, relocation or significant lifestyle changes.

Seek advice before a claim occurs

Your General Insurance Broker or Adviser can help you review your sums insured, identify possible gaps and explain how policy limits, exclusions and underinsurance clauses may apply. They can also help you consider whether valuations or specialist assessments are appropriate.

Insurance should be reviewed regularly, not placed in a drawer and forgotten. A yearly review, together with an update following any major change in circumstances, can reduce the risk of an unpleasant financial surprise when you need support most.

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.

(Feedsy Exclusive)