Underinsurance on Commercial Buildings: What It Costs You

Key points

• Whatever the policy does not pay towards a rebuild is yours to fund.
• A short figure can cut a partial claim using the calculation in your policy.
• On the policies we place, your sum insured is tested as it stood at the start of the policy year, but you do not need to wait until renewal to raise a shortfall.
• The fix is a current rebuild figure, with prices at more than one sum insured so you choose how fast to close the gap.

What is underinsurance on a commercial building?

Underinsurance means your sum insured, the amount your building is insured for, is lower than a rebuild would cost today. The insurer works from the figure on your schedule, the page of your policy that lists what is insured and for how much. The builder charges what the rebuild costs, and you fund whatever the policy does not pay.

Why is my commercial building underinsured?

Building costs moved a long way. On the Australian Bureau of Statistics' construction price indexes, non-residential building construction rose 36.8 per cent across Australia between June 2020 and June 2026. That is the category most commercial buildings fall in. Our guide to construction cost increases in Australia explains what drove the rise and whether it has stopped.

Your policy may not have moved at all. Many commercial policies apply no automatic indexation: you nominate the sum insured, and it stays where you left it. From what we see, nobody at the insurer tests the number for you. Underwriters price the risk you describe. Valuing your building or advising you on the figure is not their role.

The person paying the premium can pull the figure down too. Where a tenant funds the building premium through the outgoings, the tenant has a reason to want it cheaper. Some ask for the building to be insured for less. Underinsurance can leave the owner paying part of a repair or rebuild.

There is a second way the number goes wrong: a sum insured that was never a rebuild figure. In July 2026 a family-owned timber-processing business in regional Queensland had been insured for years at about $2.4 million. A local shed builder's rough estimate, priced at a flat rate per square metre, came to about $2.8 million. An independent quantity surveyor's on-site building replacement valuation, which we commissioned and paid for as a one-off, came to about $7.9 million. The business had been carrying cover at about 30 cents in the dollar. Our desktop building replacement estimate page shows what a flat rate per square metre leaves out.

What happens to my claim if my building is underinsured?

Every business pack we place, the policy that bundles your building, contents and liability, 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. The calculation, and any exception for smaller claims, depends on your policy.

Say your building would cost $1 million to rebuild and you insured it for $500,000. On a policy that compares the sum insured itself with the 80 per cent, your $500,000 is 62.5 per cent of the $800,000 required. Then a storm does $100,000 of damage to the roof. On those assumptions, the underinsurance calculation reduces the $100,000 claim to $62,500 before the excess. Most of those business packs compare a limit set 20 per cent above the sum insured instead, so the same claim is cut less. The co-insurance clause explained shows how each test is worked out.

In a 2025 storm claim we handled, the clause cut the owner's payout, but a line-by-line check of the insurer's calculation still moved the settlement. We tell that claim in full in How an underinsurance cut is worked out.

In our experience, roof damage is the most common commercial property claim, and a storm that takes a roof can be large enough for the clause to apply. We see insurers use aerial imagery at claim time to argue that storm damage was wear and tear. Our roof condition monitoring is a yearly aerial review that looks for rust or ponding water on your roof.

A total loss on the same numbers works differently. Most of the business packs we place pay up to 20 per cent above the amount you insured the building for, so up to $600,000 towards the $1 million rebuild. Whatever the rebuild costs beyond that is yours to fund.

On most of them, the payment is to rebuild or replace as new, unless your schedule says otherwise. On some, it drops to a lower figure if you do not rebuild. And while the building is rebuilt, the rent stops. Only a rent item on your policy replaces it.

Why does the same sum insured pay out differently on different policies?

If your sum insured covers the construction alone, it leaves out demolition and professional fees. Depending on what your policy pays for those, it could sit 20 to 40 per cent below what a rebuild needs.

On the policies we place, architect and engineer fees usually come out of the building figure, or out of the extra most of them pay above it. So they belong in your sum insured. Clearing the site is paid on top of the building limit on most. On some it comes out of the same limit, so a heavy demolition competes with the rebuild for the same money.

Costs keep moving after the figure is worked out, through the loss and the months of the rebuild, so your sum insured has to carry that rise as well.

How do I know if my commercial building is underinsured?

Your old schedules are the first check. Lay the last few years side by side and see how long the sum insured has sat unchanged, then ask what building costs have done in that time.

If the figure has only ever been indexed and never worked out again, treat it as suspect.

Check the rent. If the building is damaged, lost rent is paid only where your policy carries a rent item, and only for the period you chose. We recommend at least 18 months, and often 24 or 36 depending on your situation, and the period is yours to choose. Say your period is 18 months and the builder finishes in month 20: the rent for the last two months is not covered. The rent figure needs outgoings included, and our loss of rent guide shows how to set it.

For a first read on your own building, the two-minute underinsurance check shows you which of the warning signs you are carrying. If you know the year your figure was last set, how far building costs have risen since then puts a published percentage on the drift.

How do I fix underinsurance on my commercial building?

A desktop building replacement estimate is worked out from aerial and street imagery rather than a site visit. For the commercial buildings we insure, we commission one at new business and again at every renewal, and review aerial imagery of the roof alongside it. A broker goes through the figure with you. We commission it for our purposes as your broker, to inform the advice we give you. We can arrange an on-site valuation instead of a desktop building replacement estimate, but that's a service you pay for.

You do not need to wait until renewal to raise a shortfall. Tell us when you find it. We can ask the insurer what needs to change and how that would affect future claims. Where a change is agreed, we ask the insurer to confirm what it does to the underinsurance calculation. We review the figure again at renewal.

What will the right figure add to your premium? Where there is a gap, you see that before you decide, because we price more than one sum insured and show you what each step adds. On a business pack, the property section costs the least for each dollar of cover. Our commercial building insurance cost guide shows what owners pay for a building policy.

If the full figure is a stretch this year, we close the gap over time. Sometimes it means lifting the sum insured and adjusting the excess to keep the premium workable. The excess is the part of each claim you pay yourself. A higher excess is paid once, at claim time, and an underinsurance gap can be far larger. We explain that trade, with a client example, in Why We Sometimes Recommend a Higher Excess.

The sum insured is one part of a building policy. Our commercial building insurance page sets out the rest, from flood and leaks to fences and signs.

Frequently asked questions