The Risks of Underinsured Homes In Australia

Underinsured homes in Australia put homeowners, owners and landlords at risk. A home is underinsured when the sums insured are too low to pay the full cost to rebuild the house or replace the contents, leaving a shortfall after a claim.

In 2025, the Australia Institute polling found that 15% of homeowners said their house was underinsured. A further 4% said their house was uninsured. It also found that 19% said their contents were underinsured, while 10% said their contents were uninsured. Underinsurance affects over 800,000 Australian homes.

This risk grows as costs rise. The Australian Bureau of Statistics (ABS) said building construction prices rose 4.2% in the 12 months to March 2026. House construction prices rose 1.1% in the March 2026 quarter. New dwelling prices rose 5.6% in the 12 months to May 2026 as labour and material costs rose.

Home and contents insurance sums insured should match the current rebuild or replacement costs, because if cover is too low, underinsurance can leave homeowners with a shortfall worth thousands. Cover should not rely on market value alone. It should also allow for extra costs. These include clean-up, council fees and temporary accommodation if the policy pays for it. This guide explains what causes home underinsurance in Australia, how rising building costs affect rebuild estimates, how to avoid a shortfall, and why owners and landlords should review the sum insured each year and update cover after renovations or major work.

What Underinsurance Means

Underinsurance means insuring property for an amount that is inadequate to rebuild or replace it at the time of loss.

As many as 80% of Australian homeowners are underinsured. The insurance payout will not meet the total cost leaving the owner to somehow fund the shortfall between the final claim payout the actual rebuild costs.

Key points to understand:

• The sum insured, plus possibly some applicable additional policy benefits, is the most the insurer will pay for a claim.
• Building sums insured should match the current rebuild cost with allowances made for additional costs such as removal of debris (of the damaged building) and professional (engineers, architects, etc.) expenses.
• Market value is not the same as rebuild cost.
• Contents sums insured should match the cost to replace the contents at today’s costs
• Some policies have an average clause or coinsurance clause.
• These clauses will cut a claim payout when the home is underinsured.

In Australia, the average underinsurance gap is 34%, so the payout may not cover the right amount needed for full replacement.

The sum insured should match the full cost to rebuild or replace. If the cover is too low, the owner will pay the gap. This still applies if the insurer accepts the claim.

Common Causes Of Underinsured Homes In Australia

Many underinsured homes in Australia come from old sums. Rising building costs also add risk. Simple mistakes add more risk. Many owners renew their home insurance each year. They often do not check the current rebuild cost. As of 2026, 83% of Australian homes are underinsured.

Common causes of home underinsurance include:

• Confusing market value with rebuild cost
• Not updating building insurance after renovations
• Placing too low a value on furniture, goods and other assets
• Leaving contents insurance the same for years
• Missing clean up, debris removal and council fees
• Forgetting asbestos removal where applicable and council applications
• Using outdated building cost estimates
• Assuming the insurer will pay the full cost

Building costs change. Repair costs change. The cost of new goods also changes. Values change after renovations. Most people do not update cover after major works or buying new furniture and other contents. It is also increased when builders are in high demand, such as in the wake of a major weather related catastrophe, such as a cyclone or flood. An up-to-date insurance valuation will help owners and landlords set the right amount to replace property after a claim.

Why Building Costs Affect Rebuild Cost

The insurer needs to know what it would cost to rebuild the home at current prices. The ABS data shows that house construction prices increased by 40.8% between the September 2020 and June 2024 quarters. Without regular updates to the sum insured, homeowners will face a major shortfall when rebuilding after serious damage or a total loss. Building costs rose 31% from 2022 to 2026. It also said new dwelling prices rose 5.6% in the 12 months to May 2026 as labour and material costs rose.

A fair rebuild cost should include more than labour and materials, including full replacement and even the cost of related works. It should include:

• Demolition after major damage
• Debris removal and site clean-up
• Asbestos removal if needed
• Council fees and council applications
• Increased building costs from current code changes and harder site conditions
• Higher builder demand after storms, floods or bushfires
• Temporary accommodation if the policy pays for it
• Upgrades needed for a safe and legal rebuild

For owners and landlords, the sum insured should not remain fixed for years. If the insured amount is not updated, property owners can be left with a shortfall in the event of a total loss claim, which they will have to fund out of their pocket or via other means of financing.

How To Avoid Underinsurance

Property owners and landlords will avoid underinsurance by checking that their level of cover reflects the replacement or rebuilding costs of the assets they are insuring. The sum insured should be reviewed each year. It should also be updated after renovations. Where flood exposure is a concern, ensure that cover for flood is included either as a standard or optional inclusion.

Step	Why It Matters
Use a building cost calculator	It helps estimate the cost to rebuild today, and the Insurance Council offers useful calculators and guidance.
Review the sum insured each year	It keeps the insured amount close to real costs.
Update cover after renovations	New work will increase the cost to rebuild.
Check contents room by room	It helps count furniture, goods, appliances, electronic goods, personal items and other household assets.
Allow for extra costs	Clean up, asbestos removal, professional & council fees and other supplementary costs add to the total cost of a rebuild.
Read the policy wording	The PDS explains limits, exclusions and claim rules.
Get help if needed	Surveyor services will improve the estimate.

Check Your Insurance Cover Before A Claim Happens

If your building sum insured is too low, the insurance payout will not meet the full cost. The owner will pay the gap at the worst possible time, causing undue financial strain or worse.

The best way to avoid underinsurance is to review your sums insured and policy cover before a claim. Check your home and contents insurance. Your cover should reflect current building costs and the value of your contents. It should also allow for extra costs. These include clean-up, professional and council fees and complying with current building rules.

For landlords, the risk is greater. Underinsurance will add to the stress of a major claim and can be easily avoided.

Duo Insurance helps landlords check the cover they need before a claim exposes a costly gap. To protect your rental property from underinsurance risk, call Duo Insurance on 1300 212 323 or get a quote today.