Sum insured or total replacement: what your home policy actually promises

Under-insurance is the quietest problem in Australian general insurance. Nobody notices it at renewal, nobody notices it at a quote comparison, and everybody notices it on the day a builder hands over a quote that is a hundred and forty thousand dollars more than the policy will pay.

It has one dominant cause: a sum insured that was set once, years ago, and then carried forward with a small indexation bump each year while actual building costs did something quite different.

What the two options actually promise

Sum insured

You nominate a figure. That figure is the maximum we will pay to rebuild the home, and it is the figure your premium is calculated from. If the rebuild costs less, you are fine. If it costs more, the shortfall is yours. Most Australian home policies work this way, and most of them include a safety net that adds a further ten to thirty per cent above the sum insured, which helps but does not fix a figure that is badly short.

Total replacement

We rebuild the home as it was, to the same standard, whatever that costs, provided the information you gave us was accurate. There is no sum insured to get wrong. It costs more, and it is not available on every property, but it removes the failure mode entirely.

The number people get wrong

The sum insured is the cost to rebuild the house. It is not the market value of the property, and it is not what you paid for it. Land does not burn down. On a block in inner Melbourne, land can be sixty or seventy per cent of the purchase price, so a person who insures for the purchase price is dramatically over-insured and paying for it every month. On a large house on a cheap regional block, the opposite is true and the consequence is far worse.

Rebuild cost also includes several things people forget: demolition and removal of debris, professional fees for an architect and engineer, the cost of complying with current building codes rather than the code the house was built to, temporary fencing and site works, and the driveway, fences, retaining walls, shed and pool.

How to check yours in ten minutes

1. Find the current sum insured on your certificate of insurance.
2. Measure the floor area of the house, including the garage and any covered outdoor area, from a plan or a real estate listing.
3. Run it through a building cost calculator. The Insurance Council of Australia and most insurers publish one, and they are all built on the same Cordell cost data.
4. Add demolition, professional fees and the outdoor structures if the calculator has not.
5. Compare. If the calculator figure is more than ten per cent above your sum insured, ring your insurer and raise it.

Raising a sum insured mid-term is usually a two minute phone call and a small pro rata premium adjustment. It is one of the few things in insurance where the fix is genuinely that easy.

What moved between 2021 and 2024

Residential construction costs in Australia rose sharply through that period, driven by timber and steel supply, trade shortages and a construction pipeline that was already full. A sum insured set in 2019 and indexed at three per cent a year did not keep pace. The gap is not theoretical: it turned up in claim files across the Northern Rivers and South East Queensland floods, where a large number of otherwise sensible policies came up short.

If you have not revisited your sum insured since 2021, assume it is wrong. Ten minutes now is worth more than any amount of premium shopping.

Contents is the same problem, smaller

Most people underestimate contents by a wide margin, because they value it the way they would value it at a garage sale rather than at replacement cost. Walk each room and count what it would cost to buy everything new. The clothes alone usually surprise people. Then remember that jewellery, bicycles, cameras and laptops carry a per item limit unless they are specified, and that specifying an item is what makes it covered for its actual value rather than the default cap.