Is Your Commercial Building Underinsured? How to Set the Right Sum Insured in Brisbane

Tim Jones

Oct 1

5 min read

Most commercial property owners pick their sum insured once, usually when they buy the building, and then let it roll over at renewal for years.

That's how underinsurance happens. And you usually only find out when you make a claim.

This guide explains how sums insured should be worked out, why Brisbane rebuild costs have moved so much, and how being underinsured can cut a claim even when the damage is only partial.

What Underinsurance Actually Means

You're underinsured when the amount on your policy is less than what it would actually cost to repair or rebuild your property.

If a storm destroys your building and the policy limit is $1.5 million but the rebuild costs $2.2 million, the difference comes out of your pocket. For many owners, that gap is enough to make rebuilding impossible.

Market Value Isn't Rebuild Cost

This is the most common mistake we see.

The price you paid for a property, or what it would sell for today, has very little to do with what it costs to rebuild. Market value includes the land, which doesn't need replacing. It also reflects location, rental yield and demand, none of which affect construction costs.

Example: An investor buys a small warehouse in Rocklea for $1.8 million and insures the building for that amount. A large part of that price is the land. But the building is older, built to an outdated standard and would need demolition, engineering and compliance upgrades if it burned down. The real rebuild figure could be higher or lower than $1.8 million. Either way, the purchase price tells you almost nothing.

Your council rates notice won't help either. It values the land, not the building.

What a Rebuild Really Costs

A proper sum insured isn't just the cost of bricks, steel and labour. It should also account for:

Demolition and debris removal. Clearing a fire or storm damaged site can be expensive, especially if hazardous materials like asbestos are involved.
Professional fees. Architects, engineers, surveyors, certifiers and project managers.
Compliance upgrades. A rebuild generally has to meet current building codes and council requirements, not the standards that applied when your building went up.
Cost escalation. Rebuilding takes time. Prices can rise between the date of the loss and when the work is finished.
Site access and special construction. Sloping blocks, tight inner city sites and heritage elements all add cost.
GST. Whether you're registered for GST affects how your sums insured should be set. Check this with your broker and accountant.

Why Brisbane Rebuild Costs Keep Moving

Construction costs across Queensland rose sharply from 2020 onwards, driven by materials shortages, supply chain disruption and pressure on trades.

Brisbane has its own extra factors:

Demand surge after major events. After floods or severe storms, hundreds of properties need repairs at once. Builders and materials become scarce, and prices rise exactly when you need them. The 2022 floods showed how quickly this happens.
Major infrastructure demand. Large projects, including works ahead of the 2032 Olympic and Paralympic Games, compete for the same builders and trades.
Older building stock. Many commercial buildings in suburbs like Fortitude Valley, Woolloongabba and Albion were built well before current codes, which means bigger compliance upgrades on a rebuild.

A sum insured that was right five years ago may be well short today.

The Average Clause: How Underinsurance Shrinks Partial Claims

Many owners assume underinsurance only matters for a total loss. If a storm only damages part of the roof, surely a lower sum insured doesn't matter?

Not necessarily. Many commercial property policies include an average clause, sometimes called a co-insurance clause. If your sum insured falls below a set percentage of the property's true value (commonly 80%), the insurer can reduce your claim in proportion to how underinsured you are.

Here's how that can play out:

	Amount
True rebuild cost of the building	$2,000,000
Required sum insured at 80%	$1,600,000
Actual sum insured on the policy	$1,200,000
Proportion covered ($1.2m ÷ $1.6m)	75%
Partial storm damage	$400,000
Amount the insurer pays	$300,000

The damage is well under the policy limit, but the owner still carries $100,000 of the loss because the building was underinsured.

Not every policy has an average clause, and the wording varies. It's worth knowing whether yours does.

Don't Forget Contents, Stock and Fit-Out

Underinsurance isn't limited to buildings.

Stock levels change. A retailer carrying $80,000 of stock most of the year may hold double that before Christmas. Ask whether your policy has a seasonal increase.
Fit-out ownership can be unclear. In a leased premises, the tenant often owns and insures the fit-out while the landlord insures the building. Check your lease so nothing falls between the two policies.
Equipment gets replaced. Newer machinery and IT equipment can push up replacement values without anyone updating the policy.

Loss of Rent: Is Your Indemnity Period Long Enough?

If you lease your building out, loss of rent cover protects your income while the property can't be occupied after insured damage.

The key setting here is the indemnity period, which is how long the insurer will pay for. Many owners choose 12 months by default. But after a serious fire or flood, a rebuild can take far longer once you factor in assessment, design, council approvals, builder availability and construction.

Example: A fire guts a two-storey office building in Newstead. Approvals and builder availability push the rebuild out to 20 months. With a 12 month indemnity period, the owner loses eight months of rent with no cover.

If you occupy your own building, the same issue applies to your Business Interruption Insurance.

How to Get Your Sum Insured Right

Get a professional insurance valuation. A quantity surveyor or valuer can provide a reinstatement cost estimate specifically for insurance purposes.
Review it regularly. Many owners get a full valuation every three years and index the figure in between.
Update after changes. Extensions, renovations, new fit-outs and major equipment purchases all change your numbers.
Check how your policy settles claims. Reinstatement (new for old) and indemnity (allowing for wear and depreciation) can produce very different payouts.
Ask about the average clause. Find out whether your policy has one, and what percentage applies.
Review your indemnity period. Make sure it reflects how long a real rebuild would take, not a best case.

Where Monarch Can Help

Setting a sum insured isn't something you should guess, and it isn't something to leave on autopilot at renewal. We'll look at how your current figures were set, flag any gaps in building, contents and loss of rent cover, and arrange a valuation if needed.

Learn more about our Commercial Property Insurance or get in touch for a review of your current policy.

Call Tim today 1300 130 463 or enquire here.