Underinsurance in a High-Inflation Environment: Are you covered?

Underinsurance in a High-Inflation Environment: Are you covered?

Rising costs are putting pressure on sums insured. Don't wait until claim time to find out you're underinsured.

Over the past three years, inflation in Australia has pushed up the cost of living and doing business, with prices rising by around 13.6% overall. While inflation has recently eased back to a more typical range, its impact is still being felt, particularly in areas like construction, where cost increases remain well above average.

For both businesses and homeowners, this creates a growing risk of underinsurance. If your policy hasn't been reviewed recently, you may find that your current sums insured no longer reflect today's replacement values, leaving you exposed when it matters most.

Rising rebuild and replacement costs

The construction industry has been hit hard by inflation, with the cost of building materials and skilled labour seeing sharp increases. For property owners, this means that the sum insured on your commercial or residential property may fall short of what's actually needed to rebuild after a loss such as a fire, flood, or storm.

According to industry data, building costs have increased by more than 20% in some regions over the past two years. This isn't just a problem for new builds, it directly affects insurance claims, where outdated valuations can leave property owners significantly out of pocket.

Business Interruption: Are you covered for extended downtime?

It's not only the cost of rebuilding that has increased, repair timelines have also significantly extended. Supply chain disruptions, material shortages, and labour constraints mean businesses may face lengthy delays before resuming full operations.

If your Business Interruption insurance doesn't reflect these realities, you may find that your indemnity period (the length of time your policy will cover your loss of income) is no longer adequate. A standard 12-month indemnity period might not be enough in today's climate.

It's important to work with a broker who understands your operations and can tailor your policy accordingly. An extended indemnity period or updated cover limits could make a significant difference to the recovery of your business.

[Read: Business Interruption Insurance: Protecting Against the Unexpected ]

Machinery, Equipment, and Contents

Inflation doesn't just affect property, it's also driving up the cost of machinery, business equipment, and stock. While depreciation reduces the book value of these assets over time, the actual cost to replace them is often increasing, sometimes significantly. As a result, insured values based on depreciated figures may fall short of what's needed to fully replace the item after a loss.

From manufacturing equipment to IT systems, it's essential to regularly review your asset schedules and update insured amounts to reflect current replacement costs.

[Read: The ultimate guide for the manufacturing industry ]

Personal Lines: Homeowners, watch your contents

It's not just businesses that need to be vigilant. Personal insurance clients are equally exposed to the risks of underinsurance.

With cost-of-living increases, many Australians are deferring their annual insurance reviews. But with the price of furniture, electronics, and even second-hand vehicles rising, your existing policy limits may no longer reflect what it would cost to replace your belongings.

This is especially relevant for homeowners who have recently made significant purchases, such as jewellery, electronics, or home improvements, but haven't updated their contents policy.

[Read: Avoiding the hidden traps of underinsurance ]

Don't leave it until claim time

It's safe to say that no one likes thinking about worst-case scenarios, but planning for them is essential. Inflation is not just an economic issue; it's a risk management issue that needs your attention. The good news? A simple policy review can help identify gaps and give you peace of mind that your insurance is keeping pace with current costs.

Consequences of Underinsurance

Underinsurance doesn't just mean your policy won't cover the full cost of a loss, it can also mean the insurer is only obliged to pay a proportion of the claim, even if the loss is less than your sum insured. This is known as the co-insurance or average clause, and it can significantly reduce the payout you receive.

For example, if your property is insured for only 70% of its true replacement value, the insurer may only pay 70% of any partial loss - leaving you to fund the shortfall. In a major event, such as a fire or storm, this gap can place enormous financial strain on your business or strata scheme.

To avoid this, it's essential to ensure your sums insured reflect current replacement values, not historical costs or depreciated figures.

[Read: Are your sums insured up to date? ]

How Coverforce can help

Don't wait for a claim to discover you're underinsured. At Coverforce, our experienced brokers can help ensure your insurance coverage keeps pace with rising costs. Whether you're a business owner or a homeowner, we'll work with you to review your policy, update your sums insured, and tailor your protection to today's conditions. Contact us today for a complimentary insurance review before your next renewal.

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