Category: Insurance

When arranging insurance for a commercial property, many owners make a common mistake: using the purchase price as the sum insured.

On the surface, it feels logical. If that’s what you paid for the property, surely that’s what it’s worth? However, the purchase price doesn’t always reflect the actual cost of rebuilding.

Purchase Price vs. Rebuild Value

It’s important to understand the difference between the purchase price and rebuild value when it comes time to insuring your property. Yes, both relate to what your property is worth, but they represent and serve very different things.

Purchase Price

The purchase price of a property represents the total amount paid to acquire it on the market. It’s affected by several factors, which include:

• The value of the land.
• The property’s location and market demand.
• Broader economic conditions at the time of purchase.

None of these is relevant to an insurer if your building is damaged or destroyed. Insurance is about replacing the structure itself, not the land it sits on.

Rebuild Value

The sum insured is generally expected to reflect the full replacement value of the building, which includes:

• Demolition and debris removal.
• Professional fees (engineers, architects, surveyors).
• Current labour and material costs.
• Compliance upgrades (to meet today’s building codes).

What’s the difference?

The key difference between purchase price and rebuild value lies in what each represents. The purchase price reflects the property’s market value, including the land, location, and broader economic factors, while the rebuild value focuses solely on the cost to reconstruct the building if it were damaged or destroyed. This includes demolition, debris removal, professional fees, materials, labour, and any upgrades needed to meet current building codes. In short, insurance covers the cost to rebuild, not the market price you paid.

The cost of getting it wrong

If your sum insured is based on the purchase price rather than a professional valuation, you risk being underinsured. And underinsurance doesn’t just affect you in the event of a total loss. It can also reduce your payout even in the case of a partial claim. For example:

• A property was purchased for $2 million, but the actual rebuild cost is $3 million
• The sum insured is set at $2 million (instead of $3 million).
• A fire causes $600,000 worth of damage
• Because the building was underinsured by one-third, the insurer may pay only two-thirds of the claim (about $400,000)

This could leave you, the owner, with $200,000 out of pocket expenses even though the damage wasn’t a total loss.

Why professional property valuations matter

Construction costs in Australia have surged in recent years, driven by shortages of materials and skilled labour. Without a proper valuation, it’s easy to underestimate the cost of rebuilding today compared to when you purchased the property. A professional building valuation gives you:

• Confidence that your sums insured are accurate
• Protection from co-insurance penalties
• Peace of mind that your biggest asset is covered correctly

It’s best to arrange a professional building valuation every few years and review your insurance sums annually. That way, your cover keeps pace with any changes to your property, as well as rising rebuild costs and inflation.

Avoid underinsurance with proper valuation

The purchase price reflects market conditions, not rebuilding costs. Having a commercial property is already a significant investment, and underinsurance can create unexpected financial strain during claims. To safeguard your investment, arrange a professional building valuation and review it regularly. That way, your insurance truly reflects today’s replacement costs, not yesterday’s market value.

When it comes to protecting your assets and ensuring the sums are properly accounted for, a Broker would be a huge help. If you want advice or are interested in learning about available options for commercial property coverage, reach out to East West Insurance Brokers today.

When you think of business insurance, you probably imagine it kicking in after a total disaster, like a fire that levels your building or a car that’s completely written off. But what many business and property owners don’t realise is that even if your loss is only partial, being underinsured can leave you with serious financial strain. Shortfalls in coverage can hurt so you need to be prepared before it’s too late.

What Is Underinsurance?

Underinsurance happens when the sum insured on your policy is less than the true replacement or repair cost of your asset. In other words, you’re insured for less than what it would actually cost to rebuild, repair, or replace. It’s surprisingly common especially with the rising construction costs and inflation. So, if you’re not regularly reviewing your cover, this can also leave you underinsured and underprepared.

The 80% Co-Insurance Rule in Australia

In Australia, most commercial property and business insurance policies include a co-insurance (or average) clause set at 80% of the asset’s replacement value.

What this means:

• If you insure your asset for at least 80% of its true value, the insurer will generally pay the full amount of any loss (up to the sum insured).
• If you insure for less than 80%, the insurer can reduce the claim proportionally even if the loss is only partial.

Example:

• True Building Value: $1,000,000
• Minimum Cover Required (80%): $800,000
• Insurance Purchased: $600,000 (60% of true value)
• Loss: $200,000
• Claim Calculation: (Sum Insured / Minimum Required) X Loss

That would be [($600,000 / $800,000) X $200,000] $150,000 paid. Even though the damage was only partial, you’d be $50,000 out of pocket because of underinsurance.

The real-world Impact of underinsurance

• Unexpected repair bills – You may have to fund a large portion of repairs yourself.
• Cash flow pressure – Reduced payouts can strain your business finances.
• Delayed recovery – With less money to repair or replace assets, recovery takes longer.
• Business risk – In some cases, underinsurance can threaten not just your return to business, but also your overall ability to keep operating.

How to avoid underinsurance

1. Get regular valuations – Ensure your building, plant, and equipment values reflect today’s replacement costs.
2. Factor in inflation – Materials and labour costs rise quickly; your insurance should keep pace.
3. Review sums insured annually – Don’t just renew “as is” each year.
4. Work with an Insurance Broker – They understand co-insurance clauses and can explain how it will affect you.

Insurance should offer peace of mind, not unpleasant surprises

You take out insurance for security, not for shock and disappointment. But if your cover is less than 80% of the true replacement value, even a partial loss can leave you with a reduced payout.

So, don’t take the risk. Review your business insurance cover with a Broker. They can even recommend professional valuers to ensure your sums insured are accurate to help you avoid the risk of underinsurance.

If you’d like the support, the team at East West Insurance Brokers is ready to help you perform a review and make sure you’re properly protected.