Underinsurance: How to Keep Your Sums Insured Current

Underinsurance happens when the amount you're insured for is less than what it would actually cost to rebuild, replace or recover after a loss. It's one of the most common problems we see at claim time, and it usually isn't anyone's fault. Sums insured are set once, renewed year after year, and slowly fall behind.

Here's how it happens, why it matters, and what businesses anywhere in Australia can do about it.

How sums insured fall behind

Most business policies ask you to nominate a sum insured for each section: buildings, contents, stock, plant and equipment, and business interruption. Those figures can drift out of date for several reasons:

• Building and repair costs change. Construction materials and trade labour costs move over time, so a rebuild figure set a few years ago may no longer be enough.

• You've bought new equipment. New machinery, fit-out, computers or tools are often added without anyone updating the policy.

• Stock levels move. Seasonal peaks, bulk buying or a new product line can mean more stock on the shelves than the policy allows for.

• The business has grown. Higher turnover and gross profit mean a bigger loss if you have to close for repairs.

• Extra costs are forgotten. Demolition, debris removal, professional fees and meeting current building codes can add to the cost of a rebuild.

Why underinsurance matters

If your sum insured is too low, the most obvious problem is that a total loss won't be fully covered. But many business policies also include an average or co-insurance clause. Broadly, if you're insured for less than a set percentage of the true value, the insurer may reduce a claim in proportion to the shortfall, even for a partial loss.

That means underinsurance can affect a small claim as well as a large one. How average applies varies between policies, so check your policy wording or ask us to explain how yours works.

Business interruption: the cover that's easy to get wrong

Business interruption cover is designed to replace lost gross profit and pay extra costs while you recover from insured damage. Two settings matter:

• The sum insured. This is generally based on gross profit (as defined in the policy, which is not always the same as your accountant's figure), projected forward for the full indemnity period.

• The indemnity period. This is the maximum time the policy will pay for. Think realistically about how long it would take to get back to normal: approvals, rebuilding, replacing specialist equipment and winning customers back can take longer than expected.

A short indemnity period may look cheaper, but it can run out well before your business has recovered.

Practical steps to stay on top of your sums insured

1. Review sums insured at every renewal

Don't just roll last year's figures over. Look at each section of your policy and ask whether it still reflects your business today.

2. Get a professional valuation for buildings

If you own your premises, a valuation from a qualified valuer or quantity surveyor gives you a defensible rebuild figure, including demolition and fees. This is particularly worth doing for older buildings, heritage-listed properties and specialised industrial sites. Owners of commercial property should also check that loss of rent cover matches current leases.

3. Keep an asset register

A simple spreadsheet of your plant, equipment, fit-out and IT, with purchase dates and replacement costs, makes it easier to set contents figures and helps when making a claim.

4. Plan for stock peaks

If your stock fluctuates, ask about seasonal increases or declaration-based stock cover. This is common for manufacturers, wholesalers and retailers.

5. Talk to your accountant about business interruption

Your accountant can help project gross profit for the year ahead, which gives a sounder basis for your business interruption sum insured.

6. Tell us about changes during the year

New premises, a big equipment purchase, a fit-out or a new contract are all worth a quick call. Updating cover mid-term is often simpler than finding out after a loss.

How we help

We review sums insured with our clients Australia-wide at renewal, by phone and email, and talk through each section of the policy. We can explain how average and business interruption work under your particular policy, point out where figures look low, and adjust your cover when your business changes. See our business insurance page for the covers we arrange.

Check your cover

If you haven't looked at your sums insured for a while, now is a good time. Call us on (03) 9078 6473, email info@mminsure.com.au or contact us to arrange a review.

General advice warning: General advice only. This information is general in nature and doesn't take into account your objectives, financial situation or needs. Before deciding to buy or continue to hold any insurance product, consider whether it's right for you and read the relevant Product Disclosure Statement (PDS) and Target Market Determination (TMD), available from us or the insurer. Cover is subject to the terms, conditions, limits and exclusions of the policy.

M & M Insurance Services Pty Ltd ABN 54 664 837 138 is an Authorised Representative of Ausure Pty Ltd ABN 94 096 971 854 | AFSL 238433.