Your business is one of your most valuable assets — but is it properly protected?
Being underinsured can be just as damaging as being uninsured, leaving you exposed to major financial loss if disaster strikes.
Many Australian SMEs assume their cover is sufficient, only to discover during a claim that it falls short. This article explains what underinsurance is, how it’s calculated, and how Global Insurance Solutions can help safeguard your business from costly coverage gaps.
What Is Underinsurance?
Underinsurance occurs when your sum insured, the amount stated on your insurance policy, is less than the real cost to rebuild, repair, or replace your assets after an insured event such as a fire, storm, or theft.
It can also apply when policies fail to account for business interruption, legal liabilities, or replacement costs for machinery, stock, or fit-outs.
According to the Insurance Council of Australia, 1 in 10 businesses are underinsured, leaving owners vulnerable to closure after a major loss.
Why Australian Businesses Become Underinsured
Underinsurance is often unintentional — but it’s avoidable.
Common causes include:
- Outdated asset valuations: Failing to reflect rising construction and equipment costs.
- Automatic renewals: Letting policies roll over without review.
- Business growth: Expanding operations without adjusting coverage.
- Inaccurate sums insured: Estimating instead of valuing properly.
How to Know If You’re Underinsured?
You may be at risk of being underinsured if:
- Your sum insured only covers 80–90% of your property’s replacement cost.
- You haven’t updated your cover to reflect current construction or equipment prices.
- You haven’t allowed for debris removal, council compliance, or delays in rebuilding.
- Your indemnity period is too short to sustain operations after a loss.
Even small discrepancies can result in large out-of-pocket expenses at claim time.
Understanding the Underinsurance Clause
Most commercial insurance policies in Australia include a co-insurance or underinsurance clause.
This ensures businesses insure their assets for at least 80% of their replacement value; otherwise, any claim payout may be proportionally reduced.
The Underinsurance Formula
When a claim occurs, insurers use the following formula:
(Sum Insured ÷ 80% of Replacement Cost) × Loss = Claim Payment
Example:
If your building is insured for $1.5 million but actually costs $2 million to replace, your payout for a $500,000 loss would only be $468,750, leaving you to cover $31,250 yourself.
This shortfall can cripple a small or mid-sized business.
Underinsurance and Business Interruption
Underinsurance doesn’t stop at physical damage; it also impacts Business Interruption Insurance.
If your gross profit, turnover, or indemnity period is underestimated, insurers will again apply the co-insurance formula.
Case Study:
A catering business insured gross profit for $20,000, but had an annual turnover of $1.2 million. After a major fire, they suffered $200,000 in lost income.
When the co-insurance formula was applied, their payout was only $4,166, leaving a $195,834 shortfall.
The Real Cost of Underinsurance in Australia
Underinsurance can trigger:
- Partial payouts, forcing you to fund repairs yourself.
- Extended downtime and loss of clients.
- Debt or liquidation when recovery costs exceed cash reserves.
In some cases, a 10% gap in your sums insured can mean hundreds of thousands of dollars in uncovered losses.
How to Avoid Underinsurance?
Protecting your business from underinsurance starts with proactive review and accurate valuation.
1. Use an Underinsurance Calculator
Professional underinsurance calculators can estimate rebuilding and equipment replacement costs more accurately than guesswork.
2. Review Sums Insured Annually
Always update your policy to reflect current inflation, material costs, and growth.
3. Include Hidden Costs
Factor in debris removal, professional fees, and new compliance standards when setting sums insured.
4. Check Your Indemnity Period
Allow enough recovery time — 24 to 36 months for complex operations is often safer.
5. Partner With an Experienced Insurance Broker
Global Insurance Solutions ensures you have access to accurate valuation tools, policy reviews, and tailored advice to protect your business properly.
What Is Underinsured Protection?
Underinsured protection means securing cover that matches your true exposure — not just the minimum.
It ensures your policy reflects full reinstatement values, future income protection, and compliance-related upgrades, so your recovery is financially secure.
Global Insurance Solutions: Helping You Eliminate Underinsurance Risk
At Global Insurance Solutions, we do more than arrange policies — we help business owners understand and prevent underinsurance.
Our team reviews your current coverage, identifies hidden gaps, and ensures your sums insured reflect true replacement costs. With access to over 150 leading insurers, we arrange protection for your unique operations, whether you run a café, a warehouse, or a professional firm.
Your Business Deserves Complete Protection
Don’t wait for a claim to discover you’re underinsured.
Let our experts help you calculate the right sums insured and secure the protection your business truly needs.
📞 Call 1300 710 665
We deal in: Information & Technology | Servos | Manufacturing | Hospitality | Transport & Logistics | Medical | Marine & Cargo | Building & Construction
Also Read: Top Reasons to Invest in Cyber Insurance | Guide to Business Liability Insurance | Insurance Essential For Franchise Business
Frequently Asked Questions (FAQs)
Q1. What happens if I'm underinsured?
A1. If you’re underinsured, your insurance payout may not fully cover the cost to repair, rebuild, or replace your assets after a loss.
Q2. What are the risks of underinsurance?
Q3. How many Australians are underinsured?
A3. Around one in ten Australian businesses is underinsured, leaving them exposed to severe financial risk during unexpected events.
Q4. How to avoid underinsurance?
A4. Regularly review your sums insured, update valuations, and work with a trusted insurance broker like Global Insurance Solutions to ensure full protection.
Important notice
This article is of a general nature only and does not take into account your specific objectives, financial situation or needs. It is also not financial advice, nor complete, so please discuss the full details with your insurance broker as to whether these types of insurance are appropriate for you. Deductibles, exclusions and limits apply. You should consider any relevant Target Market Determination and Product Disclosure Statement in deciding whether to buy or renew these types of insurance. Various insurers issue these types of insurance and cover can differ between insurers.
This article provides information rather than financial product or other advice. The content of this article, including any information contained in it, has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the information, taking these matters into account, before you act on any information. In particular, you should review the product disclosure statement for any product that the information relates to it before acquiring the product.
Information is current as at the date the article is written as specified within it but is subject to change. Global Insurance Solutions Pty Ltd make no representation as to the accuracy or completeness of the information. Various third parties have contributed to the production of this content. All information is subject to copyright and may not be reproduced without the prior written consent of Global Insurance Solutions Pty Ltd.
Risk Advisor, Insurance Broker & Director
With around 15 years in insurance, Yuvi Singh is a passionate Risk Advisor, Director, and Insurance Broker at Global Insurance Solutions. Backed by a Commerce degree and ANZIIF diploma, Yuvi leads a team servicing SMEs across industries like manufacturing, logistics, fuel, IT, and more. At GIS, clients benefit from tailored, transparent advice, access to 150+ insurers, and end-to-end risk solutions. Recognised as a 2022 Insurance Magazine Rising Star and 2024 Top Insurance Broker by Insurance Business Australia, Yuvi delivers flexible, effective outcomes with integrity and innovation.