Underinsurance in Australia — What It Means and How to Fix It

Underinsurance is one of the most significant and least-discussed risks facing Australian property owners. According to the Insurance Council of Australia (ICA) 2025 figures, 23% of Australian homeowners are underinsured by more than 50% — meaning one in four homeowners would receive less than half the cost of rebuilding their property in a total loss event.

This problem has been dramatically worsened by construction cost inflation. Since 2019, rebuild costs in Australia have increased by 40–50% due to labour shortages, supply chain disruption, and increased materials costs. A property that was adequately insured in 2019 may now be underinsured by hundreds of thousands of dollars without the owner ever having changed their policy.

The 2025 cyclone season — including TC Alfred and TC Maila — exposed the scale of this problem in Queensland and Northern Australia. Many homeowners in affected areas discovered, at the worst possible time, that their sum insured was insufficient to rebuild.

• Online calculators consistently underestimate: Most insurer-provided online rebuild calculators use simplified square-metre rates that do not account for demolition costs, site clearance, architect fees, or ancillary structures. The ICA's own data shows online calculator users are more likely to be underinsured than those who obtain independent estimates.
• Renovations are frequently not reported: Many homeowners improve their properties — kitchens, bathrooms, extensions, pools, decking — without notifying their insurer to increase the sum insured. Each improvement that is not reflected increases the underinsurance gap.
• Average underinsurance gap is AU$200,000: The 2024 KPMG survey found that among underinsured Australian homeowners, the average gap between sum insured and actual rebuild cost is $200,000.

When you make a claim on an underinsured property, the consequences depend on whether the loss is total or partial — and whether your policy contains a co-insurance clause.

• Total loss — full shortfall: If your property is a total loss, your insurer pays your sum insured less your excess, and you fund any gap between that amount and the actual rebuild cost personally. There is no insurer liability for the gap regardless of the reason for underinsurance.
• Partial loss — pro-rata reduction: Some policies contain co-insurance clauses that apply a pro-rata reduction to partial loss claims when underinsurance is detected. Under a co-insurance clause, if you are insured for 60% of the actual rebuild cost, the insurer may only pay 60% of the repair cost — even for a minor claim. Check your Product Disclosure Statement (PDS) for co-insurance provisions.
• Insurer vs homeowner liability: Australian insurers are not required to warn you that your sum insured is inadequate at policy inception or renewal. The obligation to set an adequate sum insured rests entirely with the policyholder. AFCA has confirmed in multiple decisions that an insurer is not liable for losses exceeding the sum insured, even where the underinsurance was significant and foreseeable.

The most reliable way to check whether your sum insured is adequate is to compare it against an independent rebuild cost estimate. There are several approaches:

• HIA cost calculator: The Housing Industry Association publishes cost-per-square-metre data for each state. Multiply the applicable rate by your floor area and add demolition (typically $15,000–$40,000), site clearance, architect and engineering fees (typically 8–12% of construction cost), and ancillary structures.
• Rawlinsons Australian Construction Handbook: The industry-standard cost guide used by quantity surveyors and construction professionals. More detailed than online calculators but requires access to the publication.
• Independent quantity surveyor report ($800–$2,000): The most accurate method. A quantity surveyor will inspect your property, assess the full replacement cost including demolition, site clearance, professional fees, and ancillary structures, and produce a defensible report. This cost is typically tax-deductible for investment properties.
• What to include in your sum insured: Structure, internal fittings and fixtures, demolition costs, architect and engineer fees, council fees and permits, site clearance, outbuildings (garage, shed, granny flat), fencing, driveways and paths, pools, spas, and decking. Online calculators frequently exclude the last six items.

If you have suffered a loss and believe your property may be underinsured, there are steps you can take to document your position and, where possible, challenge the insurer's assessment.

• NRPG post-event replacement cost estimate: NRPG can provide an independent replacement cost assessment following a loss event. This gives you a documented figure to compare against your sum insured and the insurer's settlement offer.
• Documenting underinsurance for an AFCA complaint: If you believe your insurer failed to alert you to known underinsurance issues — for example, if you relied on the insurer's own calculator — document this carefully. While AFCA has generally held that the sum insured obligation rests with the policyholder, there are circumstances (such as insurer-provided underestimates) where AFCA may require adjustment.
• Negotiating with your insurer: Even where underinsurance is confirmed, there may be room to negotiate — particularly where the insurer made representations about the adequacy of the sum insured. Obtain all communications in writing and keep records of any guidance received from the insurer.
• AFCA's approach to underinsurance disputes: AFCA handles underinsurance disputes under the General Insurance Code of Practice and relevant policy terms. Complaints must be lodged within 2 years of the claim decision. AFCA has issued multiple determinations requiring insurers to pay beyond the sum insured in cases involving misrepresentation by the insurer about replacement cost adequacy.

The most effective protection against underinsurance is an independent replacement cost assessment before a loss event. After a loss, NRPG can provide independent assessment support — but the earlier you act, the stronger your position.