Research by the Insurance Council of Australia (ICA) consistently estimates that around 60% of Australian homes are underinsured. This means that in the event of a total loss, most homeowners would not receive enough from their insurer to fully rebuild their home. Here is why it happens and how to fix it.
This is the most common source of confusion. Your home's market value includes the land it sits on. Your insurer pays to rebuild the structure, not to buy the land again. These numbers can differ substantially.
A home in suburban Melbourne might have a market value of $1.1 million, with the land worth $700,000 and the dwelling worth $400,000 to rebuild. Insuring for $1.1 million looks generous but is irrelevant. If the house burns down, the insurer will pay up to your sum insured to rebuild the structure. If your sum insured is $400,000 and rebuilding costs $550,000, you face a shortfall of $150,000 out of pocket.
Conversely, some homeowners anchor their sum insured to the original purchase price or an old valuation, neither of which reflects current building costs.
Construction costs in Australia rose by approximately 30% between 2021 and 2024 due to supply chain disruptions, labour shortages, and increased materials costs. Many homeowners who set their sum insured in 2019 or 2020 have not updated it since. Their insured amount is now materially below current rebuilding costs even if they reviewed it diligently at the time.
A residential rebuild that cost $350,000 in 2020 might cost $455,000 in 2025. If a sum insured was not revised upward over that period, the homeowner carries a $105,000 gap without realising it.
Some insurers automatically index-link the sum insured to a construction cost index each year. Many do not. Check your policy documents to see whether your insurer applies automatic indexation. If they do not, you are responsible for reviewing and updating your sum insured annually.
Underinsurance applies to contents as well as buildings. The most common error is estimating contents value from memory rather than conducting an actual inventory. Clothing, electronics, furniture, appliances, and white goods add up faster than most people expect.
A three-bedroom family home with two working adults can easily hold $80,000 to $120,000 in contents at replacement cost. Many homeowners insure for $40,000 to $60,000 because that is the figure they chose when they first took out the policy and never reviewed.
The Insurance Council of Australia provides a free online calculator called the Home Building Replacement Cost Calculator, available at calculators.icnz.org.nz (also linked from the ICA website). It estimates the replacement cost of your home based on:
Floor area in square metres. Wall and roof construction materials. Location (because labour and materials costs vary by state and region). Number of storeys and special features such as pools, garages, and decks.
The calculator produces a dollar estimate for rebuilding your home from the ground up. This is the figure you should use as your building sum insured, not the market value and not an old estimate.
Most home insurance policies contain an averaging clause (also called co-insurance). If your sum insured is significantly below the actual replacement cost, the insurer may reduce your claim payout proportionally. This means even a partial loss, such as a kitchen fire or storm damage to half the roof, may result in a payout lower than the actual repair cost.
Example: Your home has a true replacement value of $600,000. You are insured for $400,000, meaning you are insured for two-thirds of the true value. You suffer storm damage costing $60,000 to repair. Under an averaging clause, your insurer may only pay two-thirds of $60,000, which is $40,000. You cover the remaining $20,000 yourself even though the loss was partial.
Find your current home insurance policy and check the sum insured for both buildings and contents. Run the ICA replacement cost calculator using your home's actual specifications. If the gap between your current sum insured and the calculator's estimate exceeds 10%, contact your insurer to update the sum insured. Most insurers allow this mid-policy without penalty. Check whether your policy includes automatic indexation.
The cost of increasing your sum insured is typically modest. Moving from $400,000 to $550,000 in building cover might increase your annual premium by $80 to $150, depending on your insurer and location. That is a fraction of the potential shortfall.
Compare home and contents insurance policies to make sure your cover is adequate.
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