Simply defined, underinsurance occurs when you have not purchased enough insurance cover to replace your assets following a loss.
As a concept, underinsurance can arise within any type of insurance coverage.
In Insurance terminology, however, the term underinsurance specifically refers to the Underinsurance Clause – also labelled as Co-Insurance Clause or Average Cause. These provisions apply specifically to commercial insurance policies and determine how a claim is adjusted when the insured value is below the required level.
In accordance with these clauses, if the asset/s value declared on the policy does not accurately reflect the true replacement value at the time of claim, a shortfall in claim payment will result. The insurer expects policyholders to have a reasonable understanding of their assets and business operations, and that they will take appropriate steps to insure them. If an asset is deemed underinsured, the insurer will apply a ‘penalty’ and will only pay a proportion of the sum insured, rather than the full replacement value. This can lead to significant out-of-pocket expenses.
What causes underinsurance?
Underinsurance commonly arises from outdated valuations, rapid economic changes, inaccurate asset reporting, or misunderstanding of policy terms and conditions. Understandably, it remains a challenge for many Australian businesses. While the causes can vary from industry to industry, several core factors consistently contribute to clients being inadequately covered.
1. Inaccurate reflection of the value of assets.
While some businesses may intentionally skew value to reduce their insurance costs, for many it’s an unintentional act. Your business may inadvertently undervalue their property, equipment, or stock because they rely on outdated purchase prices, depreciated values, or rough estimates rather than true replacement costs. The gap between perceived and actual value means that, when a claim occurs, the sum insured may fall far short of what is required. Willis Temby recommends a thorough analysis of your assets – sourcing a valuation far outweighs the shortfall as a result of underinsurance.
2. Not considering the full picture.
Asset values are not only limited to the value of the item itself – it refers to the full cost of reinstating the asset. This means accounting for a range of additional or often overlooked expenses that can significantly increase the total cost of repairing, rebuilding or replacing an item.
These unconsidered costs may include professional fees such as an engineer or architect, demolition and debris removal, freight and logistics, and compliance upgrades.
3. Limited knowledge of insufficient guidance provided by the insurer or broker.
Insurers and brokers play a crucial advisory role in arranging coverage for your assets. Ensuring you select a trusted advisor will ultimately guide your insurance outcome. Underinsurance can occur when risks assessments are rushed, incomplete or lack the depth needed or complex industries.
Insurance policies (and products) vary depending on insurer or underwriter, and specialist knowledge is required to interpret the cover requirements. Each policy has unique terms, conditions, exclusions, and valuation methods that can significantly influence how coverage responds at the time of a loss. Without the expertise to interpret these nuances, it becomes easy for critical gaps or obligations to be overlooked, ultimately increasing the risk of underinsurance or unexpected claim outcomes.
Renewal discussions are incredibly important to ensure you have adequate continued coverage. It is an opportunity to analyse current assets and potential purchases, in line with your policy.
4. Economic changes fluctuating asset values.
The economy is constantly evolving, shaped by shifting global markets, geopolitical tensions and changing international demand. Regular fluctuations due to inflation, labour shortages, supply-chain interruptions and rising costs of materials/goods play a significant role in asset value. Awareness of industry trends and rising valuations can help to ensure your insurance provides a solid coverage.
Your broker should be available to discuss emerging industry trends and provide informed guidance to ensure your coverage remains adequate.
How we can help
Willis Temby has a dedicated team of insurance professionals, across a range of industries and specialist areas. We conduct comprehensive risk analyses designed to identify exposures early and reduce the likelihood of underinsurance. By working collaboratively with our clients, we strive to find the best coverage to reflect your assets, operational challenges and evolving market conditions – supporting stronger protection and better outcomes.
Key Experts
Our team consists of industry-leading professionals who bring deep expertise and forward-thinking insights to every client relationship. For a comprehensive risk analysis of your current policies, and for further understanding of underinsurance, contact our specialists:
