Risk of underinsurance

Not enough cover

Underinsurance is when you don't have enough insurance to cover all the costs of rebuilding your home. You are considered to be underinsured if your insurance covers less than 90% of the rebuilding costs.

Increasing your insurance cover may not cost very much, and you may even be able to get more cover for the same or a lower price.

Why you may be underinsured

Smart tip

Check that you have enough cover each year when you're renewing your insurance or changing insurers.

You could be underinsured because:

  • It's hard to estimate what it costs to rebuild a home
  • Your insurance policy may be old (more than 3 years) and you may not have updated the level of cover needed
  • You may have completed renovations which increase the value of your home

You can also be underinsured for your home contents if you don't have enough home contents insurance to replace your things, especially your jewellery and collections.

Check your policy now

Most people only read their policy when they need to make a claim. Unfortunately, by that time it's often too late. Check your policy now to see how much your insurer will pay and under what circumstances. Also check when your insurer will reject a claim.

When working out how much cover you need, consider the possibility that your whole house could be destroyed, for example, by a bushfire or other natural disaster. Does your policy provide enough insurance to cover the cost of rebuilding your house and any extra costs you might incur? See estimating rebuilding costs and home insurance supplementary costs.

Also see storms and fires for information on insurance for natural disasters.

'Total replacement' policies have less risk

Smart tip

If you have a 'sum insured' home insurance policy, be extra careful when estimating rebuilding cost

Policies with the lowest risk of underinsurance are 'total replacement' policies, where the insurer agrees to pay the costs of replacing your building to the standard it was in before it was damaged or destroyed. 

'Sum-insured' policies have a slightly higher risk of underinsurance. You will be underinsured if there is a gap between the estimated rebuilding costs and the actual rebuilding costs.

Some sum-insured policies also offer an 'extended cover' policy that provides up to 30% on top of the sum insured in the event of a total loss - this is a good way to reduce the risk of underinsurance. Make sure you read and understand the conditions that apply to this type of policy.

Whatever type of home insurance policy you have, there is always a risk of underinsurance. The golden rule is to get enough cover for the worst case scenario.

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Last updated: 20 Jun 2017