Guide
Underinsurance and averaging: are you covered?
Insuring your building, contents or stock for less than they’re worth doesn’t just cap a total loss. Many business policies have an averaging provision that cuts every claim in proportion. Here is how averaging works, the policies that use it, and how to set a sum insured that holds up when you claim.
- How averaging cuts a claim, with an example
- The policies that use it
- When to review your sums insured
What underinsurance means
You’re underinsured when your sum insured is less than the current cost to rebuild, repair or replace what you’ve insured. Moneysmart says underinsurance means your insurance won’t cover the full cost to rebuild, repair or replace what you’ve lost. On a business policy, the effect can reach every claim, not just a total loss, because of averaging provisions.
The Insurance Council of Australia and the National Insurance Brokers Association describe averaging provisions as rules that limit how much you can be paid if you haven’t insured your property for its current value. They’re also called underinsurance or co-insurance clauses.
How averaging cuts a claim
This is the worked example in the Insurance Council and broker association fact sheet. The exact calculation depends on your policy.
| Step | Figure |
|---|---|
| What the building is worth | $1,000,000 |
| What it’s insured for | $600,000, which is 60% of its value |
| Damage from an insured event | $100,000 |
| What the policy pays | 60% of the damage, $60,000 |
| Your shortfall | $40,000 |
Moneysmart notes that most policies apply a coinsurance clause whenever underinsurance falls below 80% to 90% of the full value, and that the clause applies to all claims, not just a total loss.
Which policies use averaging
The fact sheet says averaging provisions are typically found in business insurance policies, from sole traders to large companies, including commercial building insurance, business contents insurance covering equipment, furniture and stock, and business interruption insurance.
The law requires insurers to be upfront about it. Section 44 of the Insurance Contracts Act 1984 deals with average provisions, and the fact sheet explains that it requires insurers to clearly inform customers of the nature and effect of any averaging provision in their policy. Look for it in the PDS under a heading such as underinsurance, average or co-insurance.
How common underinsurance is
The only published Australian measure comes from the Insurance Council of Australia’s 2015 survey of 1,000 businesses with fewer than 20 employees. Comparing sums insured with asset values, it found 10.4% of insured businesses were underinsured, 63% were adequately insured and 15% were over-insured, while 12.8% of small businesses held no insurance at all. Only 1.9% of insured businesses thought their cover was inadequate, which is the gap this guide is about: most underinsured businesses don’t know they are.
The pressure has grown since. In its March 2026 submission to the parliamentary inquiry into small business insurance, the Australian Small Business and Family Enterprise Ombudsman said that since 2020 many small businesses have struggled to find adequate cover at commercially viable terms, and that many are either underinsured or going without.
When to review your sums insured
The fact sheet recommends a review at each of these points:
Moneysmart adds that building costs are always rising, so a set amount may no longer be enough, and that builders, quantity surveyors or valuers can tell you current rebuild costs.
Compare business packs with the right sums insured
Underinsurance questions
What is an averaging clause in insurance?
A rule that reduces your claim in proportion to how far you’re underinsured. If you insured a building for 60% of its value, the policy pays 60% of each claim.
Does averaging apply to small claims?
Yes. Moneysmart says the clause applies to all claims under the policy, not just a total loss.
Which business policies have averaging?
The Insurance Council and broker association fact sheet lists commercial building, business contents and stock, and business interruption insurance.
How do I avoid underinsurance?
Insure for the current replacement cost, not what you paid. Review the sum insured every year and after renovations, new equipment or growth, and use a valuer or quantity surveyor for buildings.
Does my insurer have to tell me about averaging?
Yes. Section 44 of the Insurance Contracts Act requires insurers to clearly inform you of the nature and effect of any averaging provision in your policy.
Keep reading
More guides
Sources
- Insurance Council of Australia and NIBA: Understanding averaging provisions (March 2026)
- Moneysmart: Underinsurance, what it is and how to avoid it
- Federal Register of Legislation: Insurance Contracts Act 1984
- business.gov.au: Types of business insurance
- Insurance Council of Australia: Non-insurance in the small to medium sized enterprise sector (2015)
- Australian Small Business and Family Enterprise Ombudsman: submission to the inquiry into small business insurance (March 2026)
Underinsurance