Underinsurance is the most common and most costly problem in Australian home insurance. It does not show up until a major claim — and by then, the consequences are severe. The Insurance Council of Australia has estimated that around 83% of Australian homes are underinsured, meaning their sum insured is less than the full cost to rebuild. After the 2022 floods and 2019-20 bushfires, thousands of Australians discovered their insured amount covered only a fraction of their actual loss. This article explains why underinsurance happens, how to identify it, and what to do about it.
Home building insurance covers the cost to rebuild your home from the ground up — not its market value. These are different numbers, often substantially so.
Market value is what your property would sell for: it includes the land, location premium, and broader real estate market dynamics. Rebuild cost is strictly the cost of materials and labour to reconstruct the building to the same specifications. In most Australian cities, a home's market value significantly exceeds its rebuild cost because land value makes up a large proportion of the property price. In some regional or rural areas, the opposite can be true — rebuild costs can approach or exceed market value.
A common mistake: when a property is purchased or when insurance is renewed, policyholders set their sum insured to the purchase price or property market value. In an inner-city suburb where the land is worth $900,000 and the building is worth $600,000 to rebuild, insuring for $900,000 actually underinsures the building — but insuring for the full $1,500,000 purchase price significantly overinsures it. The only relevant number for building insurance is the rebuild cost, not the property price.
Australian construction costs rose sharply between 2021 and 2024, driven by supply chain disruptions, labour shortages, and increased demand from the post-COVID building boom. The Australian Bureau of Statistics (ABS) construction price index shows residential building costs increased by approximately 30–40% in some states between 2020 and 2024. Policyholders who set their sum insured in 2019 and have not reviewed it since may be substantially underinsured simply due to cost inflation, even if their policy auto-adjusts by CPI — because CPI increases have lagged actual construction cost increases during this period.
Source: ABS Producer Price Index, Construction Industry, 2024 data.
Some home insurance policies contain an averaging clause (sometimes called a co-insurance clause or proportional reduction clause). Under this clause, if you are underinsured at the time of a claim, the insurer may reduce the payout proportionally — even for a partial loss, not just a total loss.
Example: Your home would cost $800,000 to rebuild but is insured for $500,000 (62.5% of rebuild cost). A storm causes $150,000 of damage. Under an averaging clause, the insurer may pay only 62.5% of the claim — $93,750 — not the full $150,000. You are left $56,250 short on a partial loss, even though you paid premiums for 15 years.
Not all Australian home insurance policies apply averaging clauses — many standard policies pay the full claim amount up to the sum insured, without applying proportional reduction to partial losses. But this varies by insurer and product. Check your PDS under the "underinsurance," "sum insured," or "average condition" sections to determine whether averaging applies to your policy.
The most reliable method is a professional quantity surveyor valuation, which typically costs $500–$1,500 and provides a formal rebuild cost estimate. This is recommended for larger or more complex homes, or where you have done significant renovations since the property was last assessed.
For standard homes, free online rebuild calculators provide a useful estimate. The Insurance Council of Australia's Sum Insured Calculator (at homeinsurance.com.au) and individual insurer calculators use square meterage, construction type, finishes, and location to estimate rebuild cost. The calculation requires: total floor area (including garage, covered areas, and outbuildings), construction type (brick veneer, double brick, weatherboard, etc.), number of bathrooms, roof type, and any special features (pool, solar, high-end finishes).
Key inputs that significantly affect the rebuild cost estimate:
| Factor | Effect on rebuild cost |
|---|---|
| Home size (m²) | Primary driver — cost scales directly with floor area |
| Construction type (double brick vs weatherboard) | Double brick typically 15–25% more expensive per m² to rebuild |
| Slope / difficult access | Sloped blocks increase rebuild cost by 10–30% |
| Heritage listing | Materials and tradesperson requirements significantly increase cost |
| Post-renovation upgrades | Kitchen/bathroom renovations not reflected in original estimate |
Some policies offer "total replacement" or "guaranteed replacement" cover, which covers the full cost to rebuild your home regardless of the sum insured stated on the policy. If the actual rebuild cost exceeds the nominated sum insured, the insurer covers the difference up to a reasonable total replacement cost. These policies eliminate the underinsurance risk entirely and are available from several Australian insurers, though they typically cost more and may require an independent valuation to qualify.
If your home is older, has been renovated, or is in an area with unusual construction characteristics, total replacement cover is worth investigating — the premium difference may be modest relative to the risk of being underinsured on a major loss.
Building underinsurance gets more attention, but contents underinsurance is equally common. Most households accumulate electronics, furniture, appliances, clothing, jewellery, and tools over years without ever totalling the replacement value. A room-by-room inventory approach — listing every item and its current replacement cost (not original purchase price) — typically produces a number significantly higher than most policyholders' current contents sum insured. Jewellery, artwork, and musical instruments usually have separate sublimits under standard policies and require specific listing if they are high-value items.
Check whether your home insurance sum insured reflects current rebuild costs.
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