Underinsured Rental Property: What Australian Landlords Need to Know Before Making a Claim

An underinsured rental property can leave you paying a major shortfall after fire, storm, flood, theft, accidental damage or another insured event.

As rebuild costs, labour shortages and compliance costs rise, your existing policy limits may no longer reflect the real cost to repair or replace your rental property.

Underinsurance can also affect contents insurance for landlord-owned furniture, appliances and fittings. If your insured amount is too low, your claim payout may not cover the full loss of personal belongings.

That is why your property insurance cover should reflect rebuild costs, contents cover, legal liability, loss of rent and rental property risks at today’s costs.

What Does an Underinsured Rental Property Mean?

An underinsured rental property has less insurance cover than it would cost to rebuild, repair or replace after damage.

This means your claim payout may not cover the full loss after an insured event. You may need to pay the shortfall from your own pocket.

Underinsurance can affect both total losses and smaller claims. Some policies include coinsurance or average clauses, which may reduce your payout if your insured amount falls below a set level, often 80% to 90% of the property’s real replacement value.

 

Example	Amount
Actual rebuild cost	$600,000
Sum insured	$400,000
Underinsurance gap	$200,000
Underinsured percentage	33%
Potential owner shortfall	Up to $200,000

 

Why Underinsurance Matters for Property Insurance in Australia

Underinsurance is a growing risk for Australian landlords because rebuild costs can rise faster than policy limits. Labour shortages, material costs, natural disasters and stricter building codes can all make a rental property more expensive to repair or rebuild.

Market value is not the same as rebuild cost. Insurance should reflect what it would cost to rebuild the home, remove debris, meet current building standards and pay for professional fees.

Key costs landlords should account for include:

• Demolition and debris removal after fire, storm, flood or major property damage.
• Updated building code requirements for older homes that must be rebuilt to current standards.
• Professional fees for builders, engineers, architects, surveyors or council approvals.
• Hazardous material removal, including asbestos, where relevant.
• Higher labour and material costs may increase the cost to rebuild over time.

That is why landlords should review their property insurance cover each year. A policy that worked when you bought the property may no longer match today’s rebuild costs.

How Underinsurance Affects Building Insurance

Building insurance usually protects the main structure of a property against insured events such as fire, storm, theft, attempted theft and some types of water damage.

This may include the walls, roof, floors, fixtures, garages and other permanent structures listed in the policy. In many cases, building only cover applies to the structure itself, while combined policies can cover both the home and its contents.

For landlords, standard home insurance may not be enough. Rental properties carry extra risks that may need a landlord insurance policy, especially if tenants damage the property or the home becomes uninhabitable.

Underinsurance can affect home insurance cover in several ways:

• Building cover may fall short if the insured amount is lower than the real rebuild cost.
• Repair costs may exceed the payout after fire, storm, flood or major property damage.
• Rental property risks may be excluded under a standard home insurance policy.
• Loss of rent may not apply unless the policy includes suitable landlord cover, which protects rental income if the property becomes uninhabitable after an insured event.
• Legal liability may be too low if someone is injured at the insured address, so limits should be sufficient to cover injuries on the property, with at least $1,000,000 as a practical minimum.
• Temporary accommodation may not help landlords if the policy is designed for owner-occupiers.

For landlords, Building insurance cover should reflect the real rebuild cost, not the property’s market value. It should also account for risks that a standard home insurance policy may exclude.

How Underinsurance Affects Contents Insurance and Contents Cover

Underinsurance can also affect contents insurance, especially if your rental property is furnished. If your contents sum insured is too low, your payout may not cover the cost to replace landlord-owned furniture, electrical appliances, curtains, carpets or portable fittings.

For landlords, contents cover should reflect the current cost of repairing or replacing items where relevant, not the original purchase price.

Each contents insurance policy can also include limits, exclusions and rules for valuable items, so it is important to check what the policy covers.

 

Underinsurance issue	What it can mean for landlords
Contents sum is too low	The claim payout may not fully cover loss or replacement of landlord-owned items.
Replacement values are outdated	Older estimates may not reflect today’s furniture, appliance or repair costs.
Valuable items are not listed	Some high-value items may have limited or no cover unless added to the policy.
Policy exclusions apply	Certain damage, theft or tenant-related losses may not be covered.
New items are not added	New furniture or appliances may increase the amount of contents cover needed.

 

What Happens When You Make a Claim on an Underinsured Rental Property?

If you make a claim on an underinsured rental property, your insurer may only pay up to the insured amount in your policy. If the repair or rebuild cost is higher, you may need to pay the gap yourself.

Some policies may also reduce your payout if a coinsurance or average clause applies. This can affect both major losses and smaller claims.

 

Claim issue	Possible result
Rebuild cost is higher than the sum insured	You may need to pay the shortfall from your own pocket.
Coinsurance or average clause applies	The insurer may reduce the payout based on how underinsured the property is.
Contents cover is too low	Landlord-owned furniture, appliances or fittings may not be fully replaced.
Flood cover is excluded	Flood damage may not be covered, even if other weather events are included.
Higher excess applies	You may pay less in premiums, but more when you make a claim due to the basic excess.
Loss of rent is not included	You may lose rental income if the property becomes uninhabitable.

 

Does Landlord Insurance Cover Underinsurance, Accidental Damage and Rent Default?

Landlord insurance and related Building insurance products can provide cover for rental-specific risks, but only within policy limits. However, it does not automatically solve underinsurance.

If your building cover, contents cover or insured amount is too low, your claim may still fall short.

Before choosing or renewing a landlord insurance policy, check whether it includes:

• Accidental damage cover, including damage caused by tenants or guests.
• Deliberate damage cover for damage caused maliciously by the tenant or their guests
• Rent default cover, if tenants stop paying rent.
• Loss of rent, if the property becomes uninhabitable after an insured event.
• Flood cover, as this may be optional, excluded, or include flood-related events such as storm surge, only for an additional premium or extra premium.
• Legal liability, including claims for injuries at the property.
• Contents cover, for landlord-owned furniture, appliances and fittings.
• Policy limits and exclusions, including claim rules in the Product Disclosure Statement, for full details.

Also, review the Target Market Determination to check whether the policy suits your property type, financial situation and individual objectives, and review your existing policy when renewing or changing cover.

How to Avoid Underinsurance on a Rental Property

You can reduce underinsurance risk by reviewing your cover before costs rise or damage occurs.

Your cover should reflect today’s rebuild cost. This includes labour, materials, demolition, debris removal, professional fees, council approvals and building code upgrades.

You should also check whether flood cover, accidental damage cover, rent default, legal liability, and your chosen excess still suit your rental property.

 

What to review	Why it matters
Rebuild cost	Helps ensure your building cover reflects the cost to rebuild your investment property at today’s costs
Demolition and debris removal	These costs need to be factored in when calculating your rebuild costs
Building code upgrades	Older homes may need extra work to meet current standards, and the cost to comply with these requirements should be allowed for then setting your building sum insured.
Contents cover	Furnished rentals may need updated cover for furniture, appliances and fittings.
Optional cover	Flood cover, accidental damage and rent default may not apply automatically, so it’s important to check your schedule or certificate of insurance to confirm if this cover applies.
Higher excess	Can lower premiums, but increases what you pay when making a claim.

 

How to Protect an Underinsured Rental Property Before a Claim

An underinsured rental property can turn an unforeseen event into a major out-of-pocket cost. Your payout may fall short if your insured amount does not match the real cost to rebuild, repair or replace the property.

For landlords, the risk can also include contents cover, legal liability, loss of rent, flood cover, accidental damage and rent default.

Review your policy regularly so it reflects current rebuild costs, rental risks and the replacement value of landlord-owned items.

Contact Duo Insurance to help you compare landlord insurance options from providers with an award-winning insurance experience

Home Insurance FAQs for Underinsured Rental Property Owners

Can home and contents insurance cover a rental property?

It may cover the building and contents, but landlords usually need landlord insurance for tenant damage, rent default, loss of rent and legal liability.

Does flood cover apply automatically?

Not always. Some policies include flood cover, while others make it optional or exclude it, and storm surge may not be covered under every policy. Check the Product Disclosure Statement for more details before choosing cover.

Can a higher excess reduce insurance costs?

Yes. A higher excess can lower your premium, but it also increases what you pay when you make a claim.

Does contents insurance cover landlord-owned furniture?

Contents insurance cover may protect landlord-owned furniture, electrical appliances and fittings, and may help pay for replacement if those items are badly damaged, but limits, conditions and exclusions may apply.

How often should landlords review their insurance cover?

Landlords should review cover at least once a year, or after renovations, major repairs, new purchases or changes in rebuild costs, especially when construction costs or property values change quickly and when renewing an existing policy.