Taking the time to review and update sums insured now can help avoid an unpleasant surprise later and provide confidence that if something does happen to an asset, the business is properly protected.
This guide outlines practical steps to help determine whether sums insured remain adequate and how often they should be reassessed.
But first, a key concept to understand before reviewing cover is under-insurance.
What exactly is under-insurance?
A business insures a commercial building for $800,000, believing this will adequately cover the property. However, the actual cost to rebuild the building at today’s prices (including demolition, materials, labour and professional fees) is $1,000,000.
If the building is destroyed by an insured event, the insurer will only pay up to the sum insured of $800,000. This means the business would need to cover the remaining $200,000 itself to fully rebuild the property.
This simple example illustrates under-insurance… when the sum insured is less than the true cost to repair or replace an asset. Insuring assets for their full replacement value helps avoid unexpected out-of-pocket costs and supports a smoother recovery following a loss.
Tips to determine your sums insured are adequate
Obtain accurate replacement valuations
- Engage a property valuer to determine the most accurate rebuilding costs.
- For higher-value or bespoke assets, use a quantity surveyor to assess full replacement value.
- If using an online calculator, ensure all cost variables are included. Exercise caution with high-value or complex properties, as these tools may not capture unique features or provide precision.
Calculate building replacement costs correctly
Base your building sum insured on the cost to replace:
- The building structure itself.
- Fixtures such as lighting, ceiling fans, heating/cooling systems, built-in cabinetry, bathroom fittings, and electrical outlets.
- Additional structures and improvements, including sheds, decking, driveways and fencing.
Do not base your building sum on:
- Market value (sale price).
- Rates valuations.
- Bank valuations.
It is important that your sums insured reflect the full replacement value at today’s cost (not the market value, second-hand cost, or written-down, depreciated value).
Also ensure:
- The cost of land is excluded (cover should apply only to structures).
- Calculations reflect current material and labour costs.
- Current building codes and risk mitigation requirements (e.g. bushfire, cyclone or flood protections) are included.
- Structural improvements made to the property are factored in.
- Debris removal, architect fees, council fees and GST are included.
- Inflation and exchange rate impacts are considered.
Review contents and stock carefully
Insurance should extend beyond the building to include contents and stock.
- Base contents replacement on a new-for-old basis.
- Do not rely on original purchase prices.
- Do not use balance sheet values, as these reflect depreciation and written-down values rather than replacement cost.
- Ensure sums insured reflect the current number, quality and value of assets, particularly if items have been added, upgraded or replaced with higher-value alternatives.
In the event of a claim, insurers may request proof of ownership and value. Keeping records or supporting documentation can help make the claims process smoother and more efficient.
How often should you review your sums insured?
Not long ago, it was generally accepted that reviewing your insurance once a year (usually before renewal) was enough to keep your sums insured on track. In today’s changing climate, that may no longer be the case. With rising costs and ongoing market shifts, more frequent reviews can be a smart move for many businesses.
Rethinking the annual review
Policyholders are encouraged to reassess their insurance needs outside the standard annual review, particularly when it comes to property sums insured. Regular check-ins (every six months) can help ensure your cover continues to reflect the true value of your home, business premises and stock.
How an insurance broker can help keep your cover on track
Reviewing your insurance is not something you have to navigate alone. Working with a qualified team of insurance brokers like EBM Insurance & Risk means you have someone in your corner who understands the market, knows your business, and can help ensure your sums insured stay aligned with current replacement costs and risks.
To help keep your cover adequate and up to date, EBM Insurance & Risk can work with you to:
- Identify your risks — from physical exposures (flood, bushfire, crime) to financial and reputational risks.
- Review policy options — including features, coverage levels, limits, excesses and premiums, and explain how market changes may affect you.
- Clarify inclusions and exclusions — so you understand exactly what is and is not covered, and in what circumstances.
- Reassess replacement costs — including arranging specialist input, such as a property surveyor if required.
- Check sums insured and liability limits — ensuring they reflect current asset values and your evolving risk profile.
- Discuss risk mitigation strategies — helping you reduce exposures where possible and transfer appropriate risks to insurers.
- Support compliance obligations — making sure you meet policy conditions, contract terms and disclosure requirements.
- Keep you informed about market conditions — so there are no surprises at renewal or claim time.
Here to help
EBM Insurance & Risk is here to help you secure the products you need with realistic sums insured based on current market conditions and an appropriate contingency. We have the expertise and resources to guide you through the assessment process and help protect your assets from the risks you face. If you have any questions, contact 1300 755 112.
