For many commercial property owners, insurance is treated as a “set and forget” exercise. Policies are renewed each year with a primary focus on the premiums, but often little more than a glance at the sums insured. But failing to review your sums insured can expose your business to underinsurance, a gap that could have devastating financial and operational consequences.
The Scope of the Problem
Research shows underinsurance is widespread in Australia. In fact, the Vero 2025 SME Index found that 58% of small to medium businesses are not reviewing their sums insured annually. With rising construction costs, stricter building codes, and overlooked expenses like demolition and debris removal, many properties are insured for far less than it would actually cost to rebuild.
The Financial Impact
If your property is underinsured, the payout you receive in the event of damage or destruction may be dramatically reduced. This is due to clauses often built into policies, sometimes referred to as “average clauses” or “co-insurance clauses.”
For example, imagine you took out insurance for a commercial property years ago and set the sum insured for the building at $980,000. Each year your insurance renewal comes around and you mean to take the time to look at the sum insured, perhaps get a valuation, but you’ve got a lot on your plate and you just never get to it.
Then, unfortunately, you have a claim. You suffer $500,000 worth of fire damage. As part of the claim process, it is determined that the value of your property is now $1.7 million. With a sum insured of $980,000, you have only insured the building for 57% of it’s total value. It’s highly likely that due to the underinsurance clause, the insurer will only cover 57% of your loss. Leaving you with a $215,000 shortfall for this claim.
That’s money you would need to find immediately, at the same time you’re trying to recover your operations.
These out-of-pocket costs can create serious cash flow issues, delay recovery, and in some cases, force businesses to close altogether.
Operational Risks
Beyond the financial strain, underinsurance also causes operational headaches. Insufficient funds delay repairs, extend downtime, and lead to lost revenue. Business interruption at this scale doesn’t just affect the property owner; it impacts tenants, employees, and customers too.
There are also legal and compliance risks. If rebuilding funds fall short, you may not be able to meet updated building codes, zoning requirements, or accessibility standards – exposing you to liability and potential fines.
Why Businesses Get Caught Out
- Construction and material costs rising faster than policies are updated
- Failure to account for compliance upgrades, demolition, debris removal and professional fees
- Business growth or property upgrades that aren’t reflected in the insurance cover
- Lack of regular reviews, meaning your insurance is left unchanged for years.
How to Protect Your Business
The good news? Underinsurance can be avoided with the right approach:
- Get a professional reinstatement cost assessment: a qualified valuer or quantity surveyor can provide a full picture of the replacement cost, including overlooked expenses.
- Include all property elements: don’t forget external structures like car parks, landscaping, and outbuildings.
- Factor in inflation and delays: rebuilds often take 12–24 months, during which time costs can escalate.
- Review your sums insured annually: especially after renovations, upgrades, or market shifts.
- Plan for code compliance: account for modern building standards that will apply if you need to rebuild.
- Work with a broker: to help interpret clauses and make sure you’re adequately covered.
Don’t Leave it Too Late
Underinsurance isn’t always obvious until you make a claim. And by then, it’s too late. A regular review of your sums insured is one of the simplest and most effective ways to safeguard your investment and ensure your business can bounce back after the unexpected.
At Breakwater Insurance Brokers, we work with commercial property owners to make sure their insurance reflects reality, not just assumptions. If you’d like to review your current cover and protect your business from the risks of underinsurance, our team is here to help.
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