Written by William Paull
Co-Founder & Account Director
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Key points
- Four numbers decide the cut on a partial claim.
- The test looks at the start of your policy period, so that is when your figure has to be right.
- Other things can change what you are paid: GST, costs your policy pays separately, and the value the insurer works from.
- 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.
How does an underinsurance cut work on a partial loss?
On a partial loss, the underinsurance 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.
Every business pack we place carries this clause in its property cover. It is also called the average or co-insurance clause. It tests your cover against 80 per cent of what everything insured at the premises would cost to replace. So a short building figure can also reduce a claim on contents or stock.
Not every policy compares the same figure with that 80 per cent. On some, the cut starts as soon as the sum insured falls below it. On some others, the test runs on a limit set 20 per cent above the sum insured, so the figure can fall further before the cut starts. Which test applies changes what a short figure costs you at claim time.
A total loss works differently. The clause does not scale the claim. Most of the business packs we place pay up to 20 per cent above the amount you insured the building for. Whatever the rebuild costs beyond that is yours to fund. The co-insurance clause guide works both cases through with the numbers.
A business interruption claim cut for an understated gross profit runs its own test: the clause that can switch off business interruption underinsurance.
Which numbers move an underinsurance cut?
Before checking the arithmetic, establish whether the clause applies. Was it disclosed in writing before cover began, and does the claim fall below a small-loss exemption? Check the wording's threshold and the date it uses for the property's value.
- The value tested. The full replacement value in the calculation is the insurer's assessment. Where that figure is wrong, a supported correction can change the share paid.
- GST. If your business is registered for GST, some policies test the building's value net of any input tax credit you could claim. Leave GST in and the value looks bigger than it should, so a smaller share of your claim is paid.
- Costs paid on top of the sum insured. On most of the policies we arrange, debris removal sits on top of the building limit and professional fees belong in the building figure. On some, debris removal sits inside the limit. Whether a cost paid on top comes out of the value tested depends on your wording. The wording in the claim below paid professional fees on top as well, so both came out of the value tested.
- The date the value is tested. On most of the policies we place, the test looks at your cover at the start of the policy period. On those, building costs that rise during the year do not on their own cause a cut.
- The extra cost of today's building laws. On most of the same policies, the cut does not touch that cost, and some pay it only where your schedule shows it. The building sum insured guide explains why that upgrade belongs in your rebuild figure.
- The repair quote. An old quote may no longer reflect the cost of repairs. In a published complaint decision, an allowance was added for that reason.
What does an underinsurance cut look like on a real claim?
A 2025 storm claim shows those numbers at work.
Case
An owner of a retail building in regional New South Wales asked us to arrange cover. We measured the rebuild and recommended a sum insured of at least $1.99 million. The owner instructed us to place $500,000 in late 2024, about a quarter of that figure, and we set out the risk in writing before cover started, with a worked example showing a partial claim could pay as little as 25 cents in the dollar.
The owner could not accept that a rebuild would cost much more than the building's market value.
In January 2025 a storm damaged the building. The insurer's loss adjuster applied the average clause, as the policy entitled it to do, and the client engaged a paid claims advocate to fight the reduction. The two points that moved the settlement did not come from the advocate. They came from our broking team going through the adjuster's calculation against the policy wording, line by line.
First, GST. The client's company was registered for GST, so any GST the insurer paid out would come back to them as a tax credit. That meant the building had to be valued without GST when testing how far short the sum insured fell. Second, the policy paid certain costs, including debris removal and professional fees, from a separate allowance sitting on top of the sum insured, so those costs did not belong in the building value used for the test either. Correcting both brought the tested value down to about $1,308,000, and a lower tested value means a higher proportion of the claim gets paid.
| The settlement calculation | Amount |
|---|---|
| Sum insured | $500,000 |
| Building value applied in the test, after both corrections | about $1,308,000 |
| 80% of that value (what the wording tests against) | about $1,046,000 |
| Proportion of the claim payable | 47.78% |
| Storm repair cost | about $158,000 |
| Claim at 47.78% | about $75,000 |
| Final payment, after the excess and the GST credit | about $64,000 |
The adjuster adopted our building value, and the settlement was amended and paid on that basis.
The clause still did its job. The client recovered less than half of a partial loss and funded the rest, on a building they had been advised in writing to insure for roughly four times as much.
We recommend insuring for the full rebuilding cost and explain what a lower figure would mean at claim time. You can compare sums insured and excesses, then decide what you are comfortable paying for.
What happens if a claim on a policy we look after is cut?
Our specialist claims manager handles the claim with the insurer, and your broker stays involved. If an underinsurance reduction is applied, we work it out ourselves against the wording. We challenge errors in the calculation and explain the result to you. The insurer still decides the claim.
If a disagreement remains, the next step is the insurer's complaints process. An eligible complaint can then go to the Australian Financial Complaints Authority. Our claims management page explains how we help our clients through a dispute.
For help setting the amount for your next policy period, see our building sum insured guide.
Frequently asked questions
Can the average clause be taken off after a claim?
No. Consolidated Insurance Brokers cannot switch the clause off once a loss has happened. If your sum insured sat below the threshold in your wording, the insurer is generally entitled to apply it. What can still be corrected are the numbers the clause runs on, such as the building value, and that can change what you are paid. The sum insured itself has to be right at the start of the policy period.
Is a small claim cut for underinsurance?
Not if it is small enough. On the business packs we arrange, the underinsurance clause does not apply to a small loss: under 10 per cent of the policy's limit on most, or of the sum insured on some. That is no protection on a serious loss such as a fire, where the clause applies in full.