My insurer cut my claim for underinsurance. Can I challenge it?

Key points

• Ask first whether the clause can be used on your claim at all: was it put to you in writing before you bought, and does your wording waive it for small losses?
• Building costs that rose after your policy began do not, on their own, count against you in the test.
• GST, costs your policy pays on top of the sum insured, your own valuation and an old repair quote can each change what you are paid.
• On a 2025 storm claim, our review brought down the building value the adjuster worked from. The owner still carried most of the repair bill.
• If the insurer holds firm, there are two more steps: its own complaints process, then the Australian Financial Complaints Authority for businesses with fewer than 100 employees.

Can you challenge a partial loss claim cut by the average clause?

On a partial loss, the clause decides what share of the repair the insurer pays. What you get paid is worked out from four numbers: your sum insured, the building's value, the threshold and the repair cost.

The clause itself is in your policy, and if your sum insured sat below the threshold, the insurer can apply it, subject to the checks below. Most business packs test the sum insured against 80 per cent of the building's value. Some wordings set it at 85, so the figure in your own policy is the one that counts. The other three numbers each came from somewhere, and each one can be checked.

On a total loss the clause scales nothing: you receive your full sum insured, and the shortfall to the real rebuild cost is yours. How the co-insurance clause works sets out both cases.

A claim declined outright, rather than scaled down, is a different fight, and our claims management is where to start. A business interruption claim cut for an understated gross profit runs its own test: the clause that can switch off business interruption underinsurance.

Was the co-insurance clause applied to your claim properly?

• Were you told about it in writing before you bought? The insurer must have told you clearly, in writing and before you took out the policy, that the clause was there and what it does. If it did not, it cannot rely on the clause. That is section 44 of the Insurance Contracts Act 1984. In practice, insurers meet it with a prominent notice in the policy document, usually with a worked example, and the Australian Financial Complaints Authority has accepted that. Ask where yours was disclosed.
• Is the loss under the small-claim waiver? Many business packs waive average where the loss is under 10% of the sum insured, so a minor claim is paid without any underinsurance calculation. Find the threshold in your own wording.
• Was the value tested at the right date? Adequacy is measured at the start of your policy period, not on the day of the loss, so construction costs that rose during the year do not themselves trigger average.
• Was the extra cost of meeting today's building codes scaled down? On the business pack wordings we have checked, the underinsurance clause does not scale that extra cost down. Check that yours says the same. The building sum insured guide explains why that upgrade belongs in your rebuild figure.

Are the building value and the repair quote in the settlement right?

• If your business is registered for GST, was GST left out? Several of the wordings we place say in the clause itself that the value is tested net of any input tax credit you could claim. Not every wording says so, but it is worth checking.
• Were costs your policy pays on top of the sum insured counted in the value? Ask whether they went into the building value. In the claim below they had been counted, and they should not have been.
• Can your own valuer lower the insurer's figure? The full replacement value in the calculation is the insurer's assessment. A properly supported lower figure can change the proportion paid.
• Is the repair quote old? In one published decision, the Australian Financial Complaints Authority added an allowance to the settlement because the repair quote was old.

What we check: The adjuster's calculation read against your policy wording: the value tested, what went into it, and the threshold your wording actually uses.

Can a broker negotiate an underinsurance settlement?

Sometimes, and only on the numbers. Here is one we worked through.

That claim also changed how we place cover. On the business pack policies we place, we will no longer put a commercial building on cover below 60% of the measured rebuild figure from the desktop building replacement valuation we commission. If you believe our figure is wrong, you can commission your own valuation from a registered valuer and we will work from that instead. That 60% is a floor, not a recommendation, and below your policy's threshold the average clause still applies. The floor exists so that no client of ours can drift to a quarter of the real number without making a deliberate, documented decision.

What if the insurer will not move?

Next comes the insurer's internal dispute resolution, then the Australian Financial Complaints Authority. A business with fewer than 100 employees can take a complaint there. How we take a claim up that ladder, and when, is set out under claims management.

If you are already a client of ours, ring our claims line on 07 3292 1100.

Want your settlement checked before you sign?

Have the adjuster's calculation, your schedule and your policy wording in front of you. Consolidated Insurance Brokers can review the file with you, check by check.

For the next renewal, insure to a proper rebuild figure and the clause never touches you. For commercial building owners, we commission a desktop building replacement valuation at no cost to you, so your sum insured is set by a registered valuer's desktop assessment rather than a figure that drifts out of date. We commission it for our purposes as your broker, to inform the advice we give you.

Frequently asked questions