27/02/2026
Underinsurance Clause – Simplified
An underinsurance (or “average” / “coinsurance”) clause in Australia is a policy provision that lets an insurer reduce a claim payment if, at the time of loss, the property or interest was insured for less than its true value.
What it is
If the sum insured is less than the actual value of the property at risk, the insurer will pay only a proportion of the loss, even if the claim amount is well below the sum insured.
In simple terms: if you insure for less, you recover less.
In most Business policies the Co-insurance or underinsurance clause applies if the values declared are less than 80% or 85% of the replacement values (depending on the insurer), thereby allowing a 15% – 20% margin for fluctuations in values, or errors in valuation.
How it is applied
Underinsurance clause in the policy stipulates that claims will be proportionately reduced if the sum insured is more than 20% below the actual replacement cost.
Ø Cost of Repairs $500,000
Ø Sum insured appearing in the insurance policy $1,000,000
Ø Actual Replacement cost of building at time of damage occurs $2,000,000
Ø Underinsurance clause applies as Sum Insured is less than 80% of replacement cost
Ø Claim (Cost of Repairs) $500,000
Ø Amount of Underinsurance Sum Insured divided by 80% of Actual
Ø Replacement cost $1,000,000 / (80% of $2,000,000) = 62.5%
Ø Claim Payment $500,000 x 62.5% = $312,500
Ø Contribution Required by Policyholder $187,500
Key underwriting focus Insurers look at:
Ø Accuracy of declared values
Ø Stock declaration methods
Ø Inflation exposure
Key takeaway
The Underinsurance Clause enforces fair premium collection and value accuracy. Regular valuations and correct sums insured are the only way to avoid unpleasant claim surprises.
This commonly applies to
Ø Property Insurance (Building, Stock & Contents)
Ø Plant & Equipment / Contents
Ø Business Interruption Insurance (Gross Profit)
DM if you need assistance to review your risk cover to avoid surprises.
Ekam Group
Kapinjal Pandya
