Imagine this scenario: A severe fire breaks out in a commercial building, causing extensive damage. The property owner lodges a claim, only to receive devastating news – they’re underinsured. This situation is far more common than many realise.

What many businesses and commercial property owners don’t understand is that the financial risks of underinsurance go beyond just the shortfall between the insured amount and the actual replacement or repair cost. Insurers have the right to invoke the Co-Insurance Clause, which can significantly reduce a payout in the event of a claim.

How the Co-Insurance Clause Works

The Co-Insurance Clause is used by insurers to discourage policyholders from undervaluing their assets to save on premiums. It works by reducing claim settlements in proportion to the level of underinsurance. Generally, insurers require a risk to be insured for at least 80% of its replacement value before applying this clause.

Importantly, Co-Insurance doesn’t just apply to buildings, it also impacts Contents Insurance. If a business underinsures its equipment, stock, or other assets, any claim may be subject to the same reduced payout, leaving the business significantly out of pocket.

Here’s how this plays out in our all-too-familiar scenario:

• The property is insured for $900,000, but due to rising construction costs, its true replacement value has increased to $1.5 million.
• The insurer requires at least 80% coverage, meaning the minimum sum insured should be $1.2 million.
• Since the property is only insured for 75% of this amount ($900,000 ÷ $1.2 million), the insurer applies the Co-Insurance Clause, reducing all claims by 25%.
• Now, if a fire causes $400,000 in damage, the insurer will only cover $300,000, leaving the property owner $100,000 out of pocket.

The Hidden Risk in Rising Construction Costs

According to the Australian Bureau of Statistics, construction costs increased by 31% between 2020 and 2024. Many businesses and property owners haven’t updated their sums insured accordingly, unknowingly exposing themselves to the Co-Insurance Clause.

To further compound the challenge of maintaining adequate insurance, some insurers include costs for Demolition and Removal of Debris on top of the building sum insured, while others expect you to account for these expenses within your sum insured.

Protect Your Assets with the Right Advice

Navigating complex policy wording and ensuring your assets are adequately protected requires expert guidance – this is where we can help.

At Lambourne Partners Insurance, our focus is not only on securing the right level of coverage but also on managing costs effectively. Since launching our insurance division, we’ve helped businesses secure significant savings without compromising on coverage.

To ensure your business is protected, reach out to us below or on 02 4969 6600 for a complimentary insurance review.