Home and landlord underinsurance in Australia: why so many policies fall short

Many Australian homes and rental properties may be insured for less than it would cost to rebuild them today. A look at how underinsurance happens, why the gap can widen over time and the settings worth reviewing before the next renewal or claim.

Underinsurance is one of the most common and most avoidable problems in the Australian home and landlord market. Industry commentary has often pointed to underinsurance as a common issue, and the gap can widen over time as construction costs, trade availability, rebuilding timeframes and regulatory requirements change.

For owner-occupiers and landlords alike, the issue rarely surfaces at renewal. It surfaces after a fire, a storm or a flood, when the sum insured is tested against the cost of rebuilding – and the difference may be borne by the owner.

How underinsurance happens

Most policies start life with a sum insured that broadly reflects rebuild cost at the time the cover is arranged. From that point, the figure is usually adjusted each year by an indexation factor applied by the insurer. Indexation is a blunt instrument. It tracks a general inflation measure, not the specific cost of rebuilding a particular house in a particular postcode.

Over a few renewals, the gap between an indexed sum insured and the real-world cost of replacing the dwelling, outbuildings and improvements can widen substantially – particularly where the home has been renovated, extended or upgraded without the sum insured being formally reviewed.

Why the gap has widened since 2020

Construction costs in Australia have risen materially over recent years. Trade shortages, material price increases, longer build times, stricter bushfire and flood overlays and updated National Construction Code requirements have all added to the cost of putting a damaged or destroyed home back. Demolition and site clearance after a total loss, particularly where asbestos, contaminated debris or difficult access is involved, can be a significant cost on its own.

“The number on the schedule is not what your home is worth. It is the maximum the insurer will pay to put it back. Those two figures have drifted further apart than most owners realise.”

Professional fees (architects, engineers, council approvals, certifiers) and the cost of complying with current standards when rebuilding an older home are additional layers that an indexed sum insured set five or ten years ago is unlikely to fully reflect.

Where landlord policies sit

Landlord policies carry the same building underinsurance risk as owner-occupied homes, plus a set of exposures specific to a tenanted property. Loss of rent following insured damage, malicious or accidental damage by tenants, theft by tenants and liability for injury on the property may be available under a dedicated landlord policy, but the limits, sub-limits and conditions vary widely between insurers.

A common gap is sum insured for the building itself: investors often rely on the sum insured set at the time of purchase, which may have been the purchase price rather than the rebuild cost. Land value is not insured, and in many markets land represents the larger share of the purchase price – so a sum insured anchored to the purchase number can be materially short of what it would cost to rebuild the dwelling.

What a realistic sum insured looks like

A realistic sum insured for a home or rental dwelling reflects the full cost of rebuilding the structure to current standards, including demolition and site clearance, professional fees, council and certification costs, temporary accommodation or loss of rent during the rebuild period and a reasonable allowance for cost movement between the policy being set and a claim being settled.

Most insurers publish online rebuild calculators and some policies include a safety-net feature that may pay a percentage above the sum insured in certain circumstances. These are useful starting points, but they are not a substitute for a considered review – particularly for older homes, architecturally designed homes, homes in bushfire or flood overlays and properties with significant outbuildings, pools, decking or landscaping.