Underinsurance: The Biggest Risk to Commercial Building Owners
What is underinsurance on a commercial building?
Underinsurance means the sum insured on your policy is lower than what it would actually cost to rebuild your commercial building today. If disaster strikes, the shortfall is yours to fund. On a partial loss the insurer can also scale your payout down, so the gap bites you twice.
If you learned insurance from your home policy, you learned the forgiving version. Underinsure the family home, lose the roof in a storm, and the insurer usually still pays the full repair. Owners carry that assumption to their commercial building, where the rules are not the same: what your home cover forgives, a commercial policy penalises. Nobody warns you the day you sign for the building, so treat this article as that missing phone call. (For the plain product summary, see the underinsurance question on our commercial building insurance page; this goes deeper.)
Consolidated Insurance Brokers exists to stand between you and that gap. You are the owner with everything to protect; we read the fine print, check the number, and make sure the policy would do its job. The enemy is not your insurer, but the quiet shortfall in a sum insured that stopped being accurate years ago.
And the trap is easy to fall into precisely because it stays hidden. When Australian businesses are asked, only about one in ten think they are underinsured. The Insurance Council of Australia's own research found this in 2015, and Vero's 2025 SME Insurance Index found almost exactly the same a decade later. But that is only what owners believe. When quantity surveyors actually measure it, the gap is far wider: a review by MCG Quantity Surveyors of more than 2,000 of its own valuations found buildings underinsured by an average of 24%, rising to 31% for industrial property. In other words, most owners who are exposed have no idea they are, which is exactly why it goes unfixed until a claim.
Why is my commercial building underinsured?
Most likely because you did nothing wrong. You set a sensible sum insured when you bought the building, the policy renewed each year with a small automatic bump, and rebuild costs then ran away far faster than that bump could keep up. It fell behind because the ground moved, not because you were careless.
Here is the arithmetic that caught almost everyone. The Australian Bureau of Statistics reports that the prices builders charge for building construction rose 31.1% between the September quarter of 2020 and the June quarter of 2024. Non-residential construction, which covers most commercial buildings, rose 27.1%. Costs have moderated since but not stopped: the ABS put non-residential building construction prices still rising 4.3% over the year to the March 2026 quarter, driven largely by labour.
The Insurance Council of Australia reports the same surge from the materials side: building material costs are on average 30% higher than three years ago, and were still rising 4.3% over the 12 months to February 2025.
Now set that against what your policy did to keep pace. Many commercial policies apply no automatic indexation at all: you nominate the sum insured, and it stays where you left it until you change it. Where indexation does apply, it typically tracks building-cost indices, recently running at around 3% a year (Cordell indices, via Strata Community Insure). Compound 3% across four years and you lift a sum insured by roughly 13%, while non-residential building costs rose more than 27% over the same window. So even a faithfully indexed sum insured has fallen well behind what it would take to rebuild, and further still if you once chose to insure below the valuer's figure to begin with.
You are in good company, which is exactly the problem. One national quantity surveying firm, MCG, reports that 83% of the properties it formally assesses turn out to be underinsured, with an average correction of about $2.4 million. That is its own client base, not an industry audit, but it points the same way: the number on most policies is a low guess.
There is a second way the number goes wrong, and it is more dangerous because it feels diligent: a sum insured that was never a rebuild figure in the first place. This exact trap crossed our desk in July 2026. A family-owned timber-processing business in regional Queensland, insured for years at about $2.4 million under a figure its previous broker had accepted without question, asked a local shed builder what its buildings would cost to put back. The builder sent through a rough estimate of about $2.8 million, priced at a flat rate per square metre for steel sheds, with a note that he had no intention of carrying out the work. When an independent quantity surveyor measured the full job instead, in an on-site building replacement valuation CIB commissioned and paid for as a one-off, the figure was about $7.9 million, because putting the site back also meant demolition and debris removal, concrete hardstands, fencing, a rooftop solar array, professional fees, contingency and cost escalation across the rebuild, none of which was in the builder's number.
A builder's quote answers the question "what would you charge to put up these sheds". Your sum insured has to answer a different one: "what would it cost to put this whole site back". That business had been carrying cover at about 30 cents in the dollar without knowing it, and to its credit, once it could see the gap item by item, it went back to the valuer to get the figure right before any claim could test it. What a proper valuation counts, and what a casual estimate leaves out, is exactly what our desktop building replacement valuation service exists to answer.
What happens to my claim if my building is underinsured?
It depends on whether the loss is partial or total, and the two work differently. On a partial loss, a co-insurance clause can scale your payout down in proportion to how far you fall short of the cover it requires. On a total loss there is no scaling: you receive your full sum insured, and any gap below the true rebuild cost is yours.
Take a partial loss first. Many Australian commercial policies test your sum insured against at least 80% of the true replacement value before they pay in full, under a co-insurance clause sometimes called the average clause. On the numbers we use throughout these guides, a $1 million building insured for $500,000 sits at 62.5% of the 80% requirement, which turns a $100,000 roof claim into a $62,500 cheque. That is not just theory. In a 2025 storm claim we handled, an owner who had been advised in writing to insure his building for at least $1.99 million instructed $500,000 instead, and the average clause set his payout at 47.78 cents in the dollar of a partial loss. The clause-by-clause mechanics, the published determinations where the clause was upheld, and how our line-by-line review of that claim's calculation moved the final settlement, are all in our co-insurance clause guide.
A total loss flips the mechanics. No clause applies and the full sum insured is paid, but nothing above it: on the same numbers, the $500,000 arrives in full while the $1 million rebuild bill does not change, and the difference is yours before a brick is laid. The clause did not touch you here. The inadequate number did.
The insurer does not rebuild your building; it hands you money and steps back. You still face demolition, approvals, consultants, builder's lead times, and the rent that dried up when the doors closed. The policy decides only the size of that payment. Get the sum insured and the wording right and it covers the job; get them wrong and you will be explaining the shortfall to your own bank.
The clause mechanics, formula, thresholds and softeners deserve their own treatment. We walk through all of it, with worked examples for buildings, contents and fitout, in The Co-Insurance Clause: What Every Building Owner Must Know. Worth knowing here: roof damage is the most common commercial property claim we see, and it is almost always a partial loss, exactly where the clause bites hardest. (More on staying ahead of that in roof condition monitoring.)
Why does the same sum insured pay out differently on different policies?
Because the sum insured is not the whole story. Two buildings can carry the identical figure and pay out hundreds of thousands apart, because wordings differ in what they cover on top of that number: professional fees, demolition, debris removal, and meeting today's building codes. A strong wording responds well above the sum insured; a thin one stops there.
This is the part almost nobody reads, and where the real money hides. National valuer Acumentis lists what a genuine rebuild figure must include: not just building costs, but cost escalation, demolition, debris removal, re-design and application fees and other professional fees, benchmarked against current regulations. Quantity surveyor Duo Tax adds the same items, plus code upgrades that did not exist when the building went up.
Two things land. First, owners routinely insure for the structure alone and forget everything wrapped around it, so the sum insured was short before a single price rose. Second, there are two escalation clocks: costs move between the day your valuation was done and the day of the loss, and keep moving across the 12 to 24 months a rebuild takes. An accurate figure has to insure tomorrow's cost, not today's.
So what you would be paid is decided by the sum insured and the wording together, which is exactly what a broker reads for you.
How do I know if my commercial building is underinsured?
Start with three questions about your own policy. When did a valuer last put an actual figure on the rebuild cost, rather than an index nudging last year's number along? Does the policy name the exact legal entity that owns the building, including any trust? And is your loss-of-rent cover set for a realistic rebuild period, with outgoings included?
If any answer is a shrug, that is where the risk lives. Plenty of owners cannot answer the first one. QBE research found in 2019 that 62% of Australian small business owners concede they are unlikely to have the right insurance in place, and that finding pre-dates the post-2020 cost surge, so if anything it flatters the picture today.
The valuation question is the big one. If the sum insured has only ever been indexed and never independently re-valued, treat it as wrong until proven right. Indexation compounds whatever base it started from, and a five-year-old base predates the steepest construction cost run on record.
The entity question quietly voids the rest. Buildings held in a family trust or company often end up insured in a director's personal name. Then a claim happens and the entity that actually owns the building is not the insured named on the policy. The rebuild money flows to whoever is named, not whoever owns the asset. It is a two-minute check that decides whether the whole policy works.
The loss-of-rent question is about time. A destroyed building stops paying you the day it burns and does not start again until the rebuild finishes, which now takes longer than most owners assume once you add approvals and builder lead times. Choose a 12-month indemnity period and the rent can stop at month twelve while the builder finishes at month twenty. And a point owners find out too late: no commercial policy replaces rent that a solvent tenant simply stopped paying. That is a lease-enforcement problem, and no insurance policy fills it.
Answer those honestly and you will know whether you are exposed. Knowing by how much takes a number.
For a first read on your own building, the two-minute underinsurance check shows you which of the warning signs you are carrying.
How do I fix underinsurance on my commercial building?
You fix it by replacing the guess with a professional's number, then closing any gap at a pace you can afford. The aim is a policy that would actually rebuild your building, arrived at with options at every step, not a take-it-or-leave-it demand.
So we do not let clients guess the number. For commercial building clients, we commission a desktop building replacement valuation at no cost to you, carried out by a registered valuer at new business and again at every renewal, with aerial roof imagery reviewed alongside it each year. That gives you a live figure that moves with your building rather than a one-off estimate that goes stale, so it would still stand up when the 80% test is applied at claim time.
The desktop valuation is commissioned for our purposes as your broker, to inform the advice we give you.
A gap is not an emergency and not a lecture. If your building would cost more to rebuild than it is insured for, we close the difference over time, with a choice at every step. Sometimes that means lifting the sum insured and adjusting the excess to keep the premium workable. A higher excess is a few thousand dollars once, at claim time; the underinsurance gap is the rest of your building. When a higher excess is what makes full cover affordable, it is almost always the trade worth making. We explain that trade properly, with a real client example, in Why We Sometimes Recommend a Higher Excess.
Here is why now is the moment to act. Rebuild costs are still rising, but commercial insurance premiums have been falling. Marsh's Global Insurance Market Index shows commercial property rates in the Pacific region down around 14% in early 2026, the third consecutive quarter of decline and the steepest fall of any region worldwide, with insurers competing hardest for well-maintained buildings with clean claims histories. That is an unusual window: the rate reduction on your renewal can help fund the higher, accurate sum insured, so fixing an inadequate one may cost far less than you fear. Saving on the premium while the building stays underinsured is not a win. It just makes the shortfall cheaper to carry until the day you need it not to be.
None of this is about selling you more insurance for its own sake. Sometimes the honest answer is that your sum insured is close enough and your wording sound, and we will tell you so. But you should know, not hope. The aim is simple: a building whose sum insured would actually put it back.
Book your desktop building replacement valuation, at no cost to you
Frequently asked questions
How often should a commercial building be revalued for insurance?
Aim for a formal replacement-cost valuation at least every three to five years, and more often when construction costs are moving quickly, as they have been since 2020. Between valuations, automatic indexation helps a little, but it cannot substitute for a fresh professional figure once the base number is a few years old.
Professional bodies including the Australian Institute of Quantity Surveyors are commonly cited as recommending an updated insurance replacement valuation every three to five years, and many valuers shorten that to two to three years when costs are volatile. The trigger is not the calendar alone: a major renovation, a change of use, or a jump in building costs are all reasons to re-check the number sooner.
Does underinsurance affect a small claim?
Often not. Many commercial policies do not apply the co-insurance clause to small partial losses, commonly those under 10% of the sum insured on business pack policies, with larger programs applying their own thresholds, so a minor claim can be paid in full even if your building is underinsured. But the threshold is set by your specific policy wording, so it is never safe to assume.
The clause is designed to bite on larger partial losses, where the shortfall is material. A single serious event, a fire, or a storm that takes a roof, is exactly where it applies with full force, and it is the loss that can end a business. Do not read the small-claim softener as a reason to relax. Check the wording, or ask us to.
Is indexation enough to keep my sum insured accurate?
No. Automatic indexation, where a policy even applies it, has recently run at around 3% a year, while non-residential building costs rose more than 27% between 2020 and 2024 according to the Australian Bureau of Statistics. Indexation compounds whatever figure it started from, so if the base is stale, indexation only carries the error forward.
Indexation is a holding measure, not a solution, and the obligation to nominate an adequate sum insured always stays with you as the policyholder. The fix is to reset the base to a current valuer's figure, then let indexation ride on top of a number that was right to begin with.
What is the difference between my building's market value and its rebuild cost?
They are two different numbers and only one belongs on your policy. Market value is what someone would pay to buy the building, and it includes the land. Rebuild cost is what it would take to demolish, redesign, get approvals and reconstruct the building from scratch. Your sum insured must reflect rebuild cost, not the purchase price.
In a strong market the purchase price can sit above rebuild cost because of the land, so insuring to the price wastes premium. More dangerously, a building bought cheaply years ago can cost far more to reconstruct than it would fetch, because demolition, professional fees and current codes all load onto the rebuild. Land does not burn down. The structure does, and that is the number that has to be right.
Find out what your building would really cost to rebuild
You should not have to hope your sum insured is right. You should know. We will put a registered valuer's figure on your building at no cost to you, check the wording behind the number, and show you where you stand, before a claim does it for you.
The desktop valuation is commissioned for our purposes as your broker, to inform the advice we give you.
Book your desktop building replacement valuation, at no cost to you
Or call us on 07 3292 1111 and ask for a straight answer on your cover.