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Understanding underinsurance
—are you at risk?

Your home is typically your most valuable asset, yet many homeowners are underinsured.

While some people are unaware that they are underinsured, it is your responsibility to ensure that you have accurately valued your home insurance coverage. Underinsurance often catches people off-guard when they come to make a claim.

What is underinsurance?

Underinsurance means you have insured your home or contents for less than the actual cost to rebuild or replace. This can put you at significant risk of financial hardship in the event of a claim.

What is a sum insured?

The dollar value you choose to insure your home or content for is often referred to as your "sum insured". It should represent the full cost to rebuild or replace in the event of a total loss.


When’s the last time you reviewed and updated your sum insured?

Sum Insured Infographic

What are the consequences of underinsurance?

It is ultimately your responsibility to make sure that you are insured for the full replacement or rebuild cost. If you don’t, you might find yourself dealing with the following:

You make a claim and are paid less than you were expecting (and less than what is needed to rebuild your home or replace your contents).

You find yourself responsible for paying the difference in cost, which could result in significant out of pocket expense.

You may not be able to rebuild or replace to the same size or standards you had before.


The percentage by which you are underinsured matters.

Underinsurance clauses are based on the principle that if you pay only a portion of the premium that you should be paying to fully cover your home or contents – then you can only receive back an equivalent proportion of any claim.

Consider the following scenario:

Your true replacement costs  =   $1,000,000
Your chosen sum insured  =   $500,000
Percentage undervalued  =   50%

Your home is partially damaged in a windstorm and you make a claim for $250,000 for repairs. You would be paid: 
$250,000 (full claim amount) - 50% (percentage underinsured) = $125,000 (minus your deductible)

Introducing our new index-linking feature

Why? Because it’s our role as your insurer to help you manage risks and have the appropriate coverage in the event you need to make a claim. For this reason, we have added our optional index-linking feature to home policies. This is a proactive measure to help our customers keep pace with the rising cost of inflation and its impact on goods and construction – which ultimately impacts the rebuild cost of their home (your sum insured). You can choose to opt out.

How does index-linking work?

With this feature in place, your sum insured will increase by a set percentage at each renewal, and your premium will be increased proportionally to reflect the adjustment in your coverage. Index-linking is most effective when your existing policy reflects true present-day rebuilding/replacement costs on all insured items. If you haven't done so already, we encourage you to obtain a home rebuilding cost survey or property appraisal to ensure you are not at risk of underinsurance. Index-linking is not a policy rate increase.

Is true replacement cost the same as market value?

Not necessarily – there’s likely a considerable difference between market value and the true replacement cost of your home, which refers to the amount it would cost you to rebuild your home from the ground up if it were to be destroyed, including materials and labour. Market value represents the amount a potential buyer would be willing to pay to purchase your property in its current condition and takes other factors (like location) into consideration.


The difference between market value vs. true replacement value

Market value True replacement value
Tick Includes the value of the land Cross Does not include the value of the land
Tick Includes depreciation Cross Does not include depreciation
Cross Does not include debris removal costs Tick Does include debris removal costs
Cross Does not include professional fees Tick Does include professional fees
Cross Should not be used for insurance purposes Tick Should be used for insurance purposes

Get your house in order – 5 ways to avoid being underinsured

Have a qualified surveyor complete an appraisal of your property every few years. Don’t rely on purchase price.

Create and maintain a comprehensive home contents list – many people have no idea how much all of their ‘stuff’ is really worth.

Ensure valuables are photographed and appraised – some high value items require extra coverage.

Remember to adjust your sums insured following renovations and/or purchases.

Review and reconsider your sums insured at least annually, perhaps at each renewal –as the cost to rebuild has likely increased over time due to inflation.


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How can BF&M help?

At BF&M, we want to help our customers avoid costly and unpleasant surprises. Don't hesitate to get in touch so that we can help you assess whether you run the risk of underinsurance. We're here to help should you have any questions.