Contents

Key Takeaways:

  • Most property owners insure for a number that “sounds about right” - not what it actually costs to rebuild
  • The 80% rule can slash your claim payout if you’re underinsured
  • We’ve seen gaps of $150k-$400k between what people think they’re insured for and actual rebuild costs
  • Rebuild costs rise faster than most people update their insurance

You own a warehouse. It’s been there 15 years. You’ve got insurance - you picked a sum insured number years ago and never really thought about it again. Seemed high at the time.

Then there’s a fire.

The damage isn’t total - maybe 40% of the building needs rebuilding, equipment’s destroyed, stock’s gone. The insurer sends an assessor. Costs come back at $600,000 to fix it.

You think you’re sorted. You insured for $1.2 million.

But here’s where it gets ugly. The assessor comes back and says: “Your rebuild cost is actually $1.5 million, not $1.2 million. You’re underinsured. And because of the coinsurance clause in your policy, we’re paying proportionally.”

Instead of $600,000, they pay you $480,000.

You’re $120,000 short.

This happens. A lot. And it’s almost always preventable.

What actually is sum insured?

Sum insured is the maximum amount your insurer will pay out if your property is damaged or destroyed. Sounds simple. It’s not.

Here’s the thing - sum insured isn’t some random number you pick. It’s supposed to be the full replacement cost of what you’re insuring.

Not what you paid for it. Not what you think it’s worth. The actual cost to rebuild it, from scratch, to the same standard, today.

For a warehouse? That’s the cost to demolish what’s left, rebuild the structure, install new roof, flooring, mechanicals, electrical - everything. For a non-strata block? It’s the full reconstruction cost of the entire building, all units.

Most people get this wrong because they’re not actually calculating this number. They’re guessing.

Why does everyone get sum insured wrong?

Let’s be honest. Most property owners don’t sit down with a quantity surveyor or a rebuild cost calculator. That’s expensive, time-consuming, and feels boring.

Instead? You estimate. You pick a number that feels conservative. Then you call your broker.

“I reckon the rebuild would be around $1.2 million,” you say. And that becomes your sum insured.

But here’s the problem: building costs are rising faster than most people realise.

A warehouse you insured 5 years ago for $800k? It probably costs $950k-$1,050k to rebuild now. Not because the building got bigger, but because labour costs, materials, and compliance standards have all increased.

We see this constantly in renewals. Clients are shocked when we say, “Yeah, building costs are up 8-12% since you last reviewed this.”

Then there’s the psychology bit. You don’t want to insure “too much” because you think you’ll pay more premium. So you unconsciously dial down your estimate. “It’s probably closer to $1 million than $1.2 million,” you think. And off you go.

That gap? That’s where you get hurt.

The 80% rule - and why it matters

Here’s the part that confuses everyone. Most commercial property policies include something called an Average Clause (or coinsurance clause). This is standard in Australia. Here’s how it works.

The rule is simple: you need to insure for at least 80% of the replacement cost. If you don’t, the Average Clause kicks in and you pay a penalty on every single claim - whether it’s $4,000 or $400,000 of damage.

Let’s walk through what this actually looks like.

Say your warehouse costs $2,000,000 to rebuild. But you’ve only insured it for $1,200,000. That’s 60% of the replacement cost. Below the 80% threshold.

A fire damages $400,000 worth of your building.

You think: “I’m insured for $1.2 million, so they’ll pay the full $400,000.”

Wrong.

Because you’re below 80%, the insurer calculates: “You covered 60% of the rebuild cost, so we’ll pay 60% of the claim.”

$400,000 x 60% = $240,000.

You’re $160,000 short.

This is how the coinsurance clause works. You’re penalised proportionally for being underinsured - and it happens on every claim, not just the big ones.

Note: For residential properties, it depends on your policy type. Total Replacement Cover policies usually exempt the Average Clause. But standard Sum Insured policies for homes follow the same 80% rule as commercial properties.

What we actually see when we ask the questions

Here’s where the confusion gets real. When we’re reviewing a quote or doing a renewal, we ask clients: “What did you base your sum insured on?”

The answers are almost always some version of:

  • “The valuation from when I bought it five years ago”
  • “I just guessed at what felt conservative”
  • “The previous broker suggested that number”
  • “I looked at similar properties online”
  • “I thought $1.2 million sounded about right for a warehouse”

Then we ask: “Have you had a professional rebuild valuation done?”

Silence. Usually followed by: “No… should I have?”

That’s when we pull up a rebuild cost estimate. And almost every single time, the actual rebuild cost is 15-35% higher than what they insured for.

We had one conversation last month with a property owner who’d insured their commercial block for $2.8 million. Seemed solid. Until we asked about when they’d last updated that number.

“When did I get it?” They couldn’t remember. Looked it up. 2019.

Seven years of building cost inflation. We weren’t even halfway through the conversation before they realised they were probably looking at a $3.8-4 million rebuild cost now.

That’s $1 million gap. Below the 80% threshold. Coinsurance clause applies.

The worst part? They didn’t know any of this until we asked the right questions.

Most brokers don’t ask. Most property owners don’t volunteer the information. So the underinsurance just sits there, invisible, until a claim happens.

Why does rebuild cost matter more than you think?

You’re probably thinking: “My property’s worth less than the rebuild cost. Why would I insure for more than it’s worth?”

Here’s why: insurable value and market value are different things.

Your warehouse might be worth $1.5 million on the open market. But rebuild costs might be $1.8 million. Why? Because you’re not selling it - you’re rebuilding it. And rebuild includes:

  • Demolition of damaged structure
  • Site remediation and compliance work
  • Materials at current market rates (not 2020 rates)
  • Labour costs (way up)
  • New systems, not salvaged systems
  • Building approvals and inspections
  • Contingency for unexpected issues (usually 10-15%)

These add up fast. Often rebuild costs are 20-30% more than market value, especially for older properties that need modernising during rebuild.

How to calculate sum insured properly

You’ve got a few options here.

Option 1: Get a professional rebuild valuation.

This is the gold standard. A quantity surveyor or valuer gives you an exact figure. It costs $1,500-$3,000 but it’s accurate. Especially if you own multiple properties or have complex assets, this is worth it.

Option 2: Use a rebuild cost calculator.

There are online tools. Take your building area (square metres), property type, location, and age. They’ll estimate rebuild cost per square metre. Not as precise as a surveyor but better than guessing.

Option 3: Talk to your broker (us).

We’ve seen hundreds of properties. We can ballpark based on comparable buildings in your area. It’s not a formal valuation but it’s way more informed than your gut estimate.

The key? Don’t just update the number by inflation. Get it professionally assessed at least every 3-5 years. Building costs change faster than general inflation.

What happens in a claim if you’re underinsured?

Let’s be clear about the practical fallout.

If you’re caught by the coinsurance clause, the insurer doesn’t just reduce your claim. They reduce it proportionally to how underinsured you are. That $400k damage claim becomes $240k. You’re $160k out of pocket.

Where does that money come from? Your business cash flow. Your contingency fund. Your profits.

Or you don’t rebuild. You do partial repairs. You lose the use of that space. Your tenants leave. Your income drops.

It’s not abstract. It hits your bottom line immediately.

We’ve seen clients in this position choose not to rebuild because they couldn’t cover the gap. A $1.2 million property that could have been restored sits half-finished.

All because they guessed at their sum insured.

Frequently Asked Questions

Does sum insured have to be the full rebuild cost?

Yes. That’s the point. If you insure for less, the coinsurance clause means you’re underinsured and the insurer pays proportionally.

Can I insure for more than rebuild cost?

Technically yes, but the insurer won’t pay more than the actual cost to rebuild. There’s no point overinsuring - you won’t get a payout larger than the actual loss.

Does sum insured change every year?

It can, especially if you make major improvements or if building costs spike. We usually recommend reviewing it every 2-3 years minimum. In an inflationary environment, annual reviews make sense.

What if I can’t afford the full rebuild cost as a sum insured?

Then you’re choosing to self-insure for the gap. That’s a business decision, but make it consciously. Know you’re underinsured and what that means if a claim happens.

Getting your sum insured right

Here’s the honest bit: most business owners don’t know their actual rebuild cost. They’re insuring on a guess.

And when a claim happens, that guess comes back to haunt them.

The solution isn’t complicated. It’s just one conversation.

You sit down, work out the actual replacement cost of your property, and make sure you’re insured for at least 80% of that number. Ideally 100%.

Then you update it every few years because costs don’t stay static.

Boring? Yes. Important? Absolutely.

Reach out to Tank Insurance and let’s do a sum insured review on your property. We’ll look at your current cover, check it against actual rebuild costs, and make sure you’re not one fire away from a $100k+ shortfall.

Call us on 02 9000 1155 or email [email protected].

This is general information only. It does not take your objectives, financial situation, or needs into account. Always read your Product Disclosure Statement and seek independent advice before making insurance decisions.

Feedback

Was this helpful?