Commercial property owners across Australia are facing a quieter but increasingly significant risk: underinsurance.
For many businesses, the issue has not come from major operational changes or large property acquisitions. Instead, it has developed gradually through rising construction costs, inflation, labour shortages, compliance changes, and shifting insurer expectations.
A building insured five years ago may now cost substantially more to rebuild. In some cases, even policies reviewed annually may no longer reflect current replacement values.
This matters because underinsurance often only becomes visible at claim time — particularly after major fire, storm, flood, or catastrophe losses. By then, the financial gap can be significant.
For commercial property owners, landlords, strata operators, and businesses with physical assets, underinsurance is becoming part of broader risk and financial planning discussions rather than simply an insurance administration issue.
What Underinsurance Actually Means
Underinsurance occurs when the insured value of a property is lower than the actual cost to rebuild or replace it.
Importantly, this is not just about the market value of the building. Insurers assess rebuilding costs differently. A proper replacement value may also include:
- demolition and debris removal
- professional fees
- compliance upgrades
- escalation in material and labour costs
- site access complications
- tenant fit-outs or specialised infrastructure
- business interruption exposure during rebuild periods
Many businesses underestimate these additional costs.
Recent commentary across the Australian insurance and construction sectors continues to point to rising replacement cost pressures. The Insurance Council of Australia reported that average residential construction costs increased materially between 2019 and 2024, with commercial rebuilding costs facing similar inflationary pressure.
At the same time, insurers and loss adjusters are continuing to report elevated claims inflation linked to labour shortages, supply chain disruptions, and catastrophe repair demand.
Why The Problem Is Growing In Commercial Property
Construction Costs Have Changed Faster Than Many Policies
One of the biggest drivers of underinsurance is that rebuilding costs have moved faster than many insured values.
During the past several years, commercial construction costs have been affected by:
- labour shortages
- higher material costs
- infrastructure demand
- supply chain delays
- increased contractor pricing
- natural catastrophe repair demand
Several industry reports suggest building costs in Australia have risen close to 30% since 2019.
For commercial property owners, this creates a simple issue: insured values that were reasonable several years ago may no longer reflect current rebuild realities.
This is particularly relevant for:
- warehouses
- industrial facilities
- strata buildings
- hospitality venues
- older commercial buildings
- properties with specialised fit-outs
- regional or catastrophe-exposed locations
Compliance And Building Standards Continue To Shift
Another issue often overlooked is compliance upgrades following a major loss.
Rebuilding today may require compliance with updated building codes, fire protection standards, accessibility requirements, energy efficiency rules, or council conditions that did not exist when the property was originally constructed.
These additional costs can materially change the rebuild figure.
Many businesses focus only on base construction replacement costs and overlook how regulatory requirements can influence claim outcomes.
The Average Clause Is Often Misunderstood
One of the more difficult aspects of underinsurance is the “average clause” included in many commercial property policies.
If a property is significantly underinsured, insurers may reduce the claim payout proportionally — even for partial losses.
For example, if a building should have been insured for $10 million but was only insured for $7 million, the insurer may only pay 70% of certain claim costs.
This can create substantial out-of-pocket exposure for property owners during already difficult operational periods.
Many commercial property owners are not fully aware of how these clauses operate until a claim occurs.
Business Interruption Is Also Becoming More Exposed
Underinsurance discussions are no longer limited to physical buildings.
Business interruption calculations are becoming increasingly important, particularly as rebuild periods extend.
Labour shortages, permit delays, supply chain disruption, and contractor availability can significantly increase recovery timeframes following major losses.
In practice, many businesses discover their indemnity periods are too short or their declared gross profit calculations no longer reflect current operations.
For landlords and commercial property investors, delayed tenant reoccupation can also create prolonged rental income disruption.
This is becoming particularly relevant in sectors such as:
- hospitality
- retail
- healthcare
- industrial operations
- mixed-use developments
Natural Catastrophe Exposure Is Increasing Pressure
Climate and catastrophe exposure are also influencing underinsurance risk.
Properties exposed to flood, cyclone, bushfire, or storm activity are seeing ongoing insurer scrutiny around rebuilding assumptions, valuations, and risk engineering controls.
Recent APRA commentary has also highlighted broader concerns around insurance affordability, catastrophe exposure, and the growing financial risks associated with uninsured or underinsured property assets.
For commercial property owners, this means insurers are increasingly focused on:
- accurate declared values
- property condition
- maintenance standards
- catastrophe mitigation
- construction type
- occupancy exposure
- tenant activities
As underwriting becomes more detailed, outdated sums insured are attracting greater attention.
Why Annual CPI Increases Are Not Always Enough
Some businesses assume automatic annual inflation adjustments solve the issue.
In reality, standard CPI increases may not fully reflect actual commercial rebuilding conditions.
Construction inflation can move differently to broader economic inflation — especially during periods of labour shortages or catastrophe-related demand spikes.
That is why insurers, valuers, and brokers are increasingly encouraging formal replacement cost valuations rather than relying solely on indexed increases.
This is particularly important for higher-value or specialised properties where rebuilding complexity materially affects costs.
What Commercial Property Owners Should Review
For many organisations, underinsurance is less about one incorrect figure and more about policies not evolving alongside the business itself.
Areas worth reviewing include:
Building Sums Insured
Do current values reflect realistic rebuild costs today?
Professional Valuations
When was the last formal insurance valuation completed?
Business Interruption Periods
Would the indemnity period realistically cover rebuild and recovery timeframes?
Tenant Improvements And Fit-Outs
Have renovations, upgrades, or occupancy changes been reflected properly?
Compliance Exposure
Would rebuilding trigger updated code requirements?
Catastrophe Exposure
Has flood, cyclone, or bushfire exposure changed insurer expectations?
These conversations are increasingly becoming part of broader operational and financial risk management rather than simply annual renewals.
As noted in Barrack’s recent article on rebuild cost pressures, many businesses are discovering that insured values can fall behind operational reality surprisingly quickly.
Final Thoughts
Underinsurance is becoming a bigger issue because the cost and complexity of recovery have changed.
Construction inflation, compliance obligations, catastrophe exposure, and longer rebuild timeframes are all influencing how insurers assess commercial property risk.
For many property owners, the challenge is not whether they have insurance — it is whether the policy still reflects the real cost of recovery if a serious loss occurs.
If your property portfolio, operations, or rebuilding costs have changed over recent years, it may be worth reviewing whether your insurance program still reflects current exposures.
Barrack Broking can help review commercial property insurance structures, declared values, and broader risk considerations to ensure policies remain aligned with how businesses operate today.
