What does underinsurance mean? How to know if you're underinsured

What is underinsurance?

Property underinsurance is where the insured value of a property is insufficient to cover the cost of rebuilding or repairing it in the event of a disaster. Contents underinsurance is when the replacement value of personal belongings, such as jewellery, electronics, or artwork, is not accurately assessed and insured. In the event of theft, loss, or damage, the insured amount may not be enough to fully replace the items.

The vast majority of Australian households are underinsured. The Australian Securities and Investments Commission (ASIC) states that up to 80 percent of homeowners are underinsured.

“Underinsurance is a major problem in Australia, particularly given the prevalence of natural disasters,” says Kirsty Hayes Head of Home & Business Insurance at RACV.

“After a bushfire or flood, a home can become a total loss, whereby the home needs to be completely rebuilt, or majority of the contents need replacing. In this situation, if the household doesn’t have sufficient home and contents insurance coverage to fully rebuild or replace contents, it makes an already distressing situation much worse.”

“It may even mean the home can’t be rebuilt to the same size or quality, or that the homeowner is forced to borrow additional funds to rebuild the home or replace their contents,” Hayes adds.

Who is likely to be underinsured?

Hayes says that those who have had home insurance coverage in place for a while without making any updates are likely to be underinsured.
 
“Underinsurance can happen over time. It often occurs to people who have been insured for a long time in the same home and haven’t really thought about their insurance coverage since," says Hayes.

"It could be that homeowners may have adequately insured their home and contents 10-20 years ago but have just relied on a CPI indexation increase applied to the home insurance policy in the following years.”

In bushfire areas, underinsurance can happen because of changes in building regulations such as bushfire zoning, explains Hayes.

“Changes to bushfire zoning regulations brought in by state and local governments mean that some older homes must now be rebuilt to a much higher standard than they were originally constructed. This can substantially increase the cost of rebuilding the home.

“Some homeowners don’t realise the cost of building a brand new house. Inflation, supply chain issues, building material shortages and increasing labour costs mean the cost of rebuilding a home has increased significantly over the past few years, so it is important that homeowners are regularly reviewing their home insurance coverage."

Common causes of underinsurance

While there are multiple factors that lead to underinsurance, one of the more common ones is guessing how much it would cost to rebuild or replace a home, rather than contacting professionals such as builders and valuers, or using a building calculator as a guide.

Other reasons for underinsurance include not accounting for upgrades to the home as well as accumulated assets, increased building costs like materials, labour or updated building codes, and supplementary costs like demolition, clean up, council applications, surveyors and architects.

While some insurers may cover this as part of their standard policy, it is advised people double check their insurance policy regularly to ensure underinsurance does not occur.

Underinsurance can also occur due to marriage, arrival of children and changes in lifestyle.