Home owners should take action to avoid being caught out if they need to claim for repairs or replacement of their home by making sure their sums insured reflect today's costs. Relying solely on the Consumer Price Index (CPI) could result in a home building insurance payout falling significantly short if their property is severely damaged or destroyed.

Why? Because while the CPI surged by 7.8% nationwide over the 12 months up to December 2022, the Building Price Index rose even more to 11% in the 12 months leading up to June 2022. This discrepancy constitutes a warning to home owners to update the sums insured on their home building insurance or risk incurring a loss.

What's causing this home value underinsurance gap?

A perfect storm of factors has created conditions that are driving up the price of building materials, compounded by:

  • labour supply shortages
  • disruptions in the supply chain
  • demand for repair and rebuilding projects in the aftermath of major weather events.

As a result home owners or investors who need to rebuild or repair their damaged property should brace themselves for continued challenges and heightened expenses in the construction industry.

How to avoid the underinsurance gap on your property

Regularly updating the sums insured on your property to ensure they cover the replacement cost of the building is essential to avoiding underinsurance.

A good way to do this is to get an independent property valuation. This will ensure the sums insured are reflective of the true cost to rebuild the property.

It is recommended a building replacement valuation be conducted at least every three years. Gallagher insurance brokers can support this for their clients and/or you can do this directly with market providers.

Other options for obtaining an accurate and up to date property valuation include:

  • engaging your broker to discuss the conditions, sub-limits and exclusions specified in your home or landlords policy. You may have the option to endorse your policy, which allows for automatic adjustments to the sums insured over time
  • implement risk management practices. We can work with you to apply risk management practices to mitigate the risk of underinsurance
  • consider using online calculators, such as the Corelogic's Cordell Sum Sure calculator, to compare your property's estimated replacement cost against the existing sum insured prior to engaging your broker
  • if you have suffered a loss and your property is completely destroyed, approach a registered builder or architect for a professional estimate of the cost of rebuilding.

Key insurance terms to understand when reviewing your property sums insured cover

It's important to check the terms and conditions underlying your property insurance and this is an area where broker expertise can make the difference between a gap in your policy and adequate cover.

  • Co-insurance/underinsurance — means if your sums insured are below the value of reinstatement at the commencement of your insurance period you may be liable for the difference.
  • Declared value — your assessment of the cost of reinstating the insured property at the time you take out or update your property cover. This amount should include professional fees, debris removal, compliance with updated regulations and environmental, social and governance considerations.
  • Average — refers to the payout in the case of underinsurance, which is restricted to the same proportion of the loss as the sum insured falls short of the total replacement value of the insured asset.
  • Day one reinstatement — protects against a shortfall in a claim payment by allowing for a capped percentage increase in reinstatement costs.
  • Exclusion — makes the insurer exempt in certain circumstances or for specified types of loss.

Understanding these terms and how they relate to your home building insurance is critical. Your broker can help by recognising potential issues and suggesting avenues for addressing them.

Your insurance broker can help ensure you have the cover you need

Our property insurance specialists can provide invaluable advice and help with calculating the appropriate sum insured for your home building cover, checking that the terms of your policy are current and allowing for a realistic time frame.

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Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective, and offer broad information about risk mitigation, loss control strategy and potential claim exposures. We have prepared this commentary and other news alerts for general information purposes only and the material is not intended to be, nor should it be interpreted as, legal or client-specific risk management advice. General insurance descriptions contained herein do not include complete insurance policy definitions, terms and/or conditions, and should not be relied on for coverage interpretation. The information may not include current governmental or insurance developments, is provided without knowledge of the individual recipient's industry or specific business or coverage circumstances, and in no way reflects or promises to provide insurance coverage outcomes that only insurance carriers' control.

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