Australia: Avoiding the risk of under-insurance

In brief - Under-insurance can leave you severely out of pocket in the event of a claim

Under-insurance can have dramatic consequences for a business, as it can leave you without sufficient cover in the event that a claim is made under the policy.

What is under-insurance?

Under-insurance arises when property is valued for the purposes of a liability policy for less than its value. For example, a business may insure the value of its stock at $100,000. A premium is calculated by the insurer on this basis.

However, if there is a fire where the stock is stored and it turns out that the value of the stock had increased to $200,000, then when it comes to calculating the insured loss, under most liability policy wordings the insurer is entitled to impose a penalty via under-insurance averaging or co-insurance provisions.

Accordingly, even though the sum insured on the policy is $100,000, the business is likely to receive something less, as the insurer expects the business to have insured the full amount of the risk.

What if one of your customers makes a claim against you?

Under-insurance also arises when a business fails to estimate accurately the value of claims which could be made against it by its customers. For example, a suburban accountant acting as a sole practitioner, dealing primarily with tax agent work, may consider that an insured sum of $1 million for any claim in negligence would be sufficient.

But consider this scenario. The accountant provides advice about the sale of a business and associated assets. If the client then makes a claim for $2 million for failure to advise about the tax consequences of the sale of an asset, the accountant could be (at least) $1 million out of pocket.

What steps should you take to protect yourself against under-insurance?

With liability policies which cover property and business stock, be careful to insure the full value (replacement cost), otherwise you risk receiving even less than the sum insured because of the averaging provisions in the policy. If the value of stock at the premises is increasing over time, or there are increases in business turnover, then you should inform your insurer.

In any event, you will be obliged to make such disclosures at the time of renewal of the insurance policy. This may result in additional premiums being charged, but will more likely protect you against the consequences of under-insurance.

Assessing the risk of claims being made against your business

For other liability policies, including professional indemnity and public liability policies which cover breach of duty, closely assess the risk of claims being made against your business and the potential quantum of such claims. In addition to reviewing your own business, this may require a detailed analysis of your client base and the business they are doing.

For example, if you are a logistics company which regularly transports expensive goods for clients, what happens if those goods are damaged in transit due to your breach of duty or conduct? What if you can't rely on appropriate conditions excluding your liability because they haven't been properly incorporated into the contract of carriage? Will your insurance be sufficient to meet any claim?

Review your insurance policies regularly and get professional advice

Carefully review the appropriateness of the sums insured on each of your policies on at least an annual basis. If there are significant changes to your business during the year, either in business turnover, stock value or building reinstatement and replacement costs, be sure to disclose this to your insurer.

Speak with a licensed insurance broker or insurance adviser who has experience with the type and level of cover required in your particular industry. If you don't know where to start, ask your industry association. They are likely to be able to recommend a broker or insurance adviser to you.

Under-insurance could lead to disputes with your insurer and significant legal costs

Another consequence of under-insurance, depending upon the precise policy wording, is that the insurer may still have the right to conduct the defence of any claim made against your business and to engage its own lawyers to do so.

However, your interests and those of your insurer may not always align, particularly if your business has a significant under-insurance exposure and there is a debate between you and your insurer on the question of liability.

In those circumstances you may want to consider obtaining your own independent legal advice throughout the process. This comes at an additional cost, but will likely protect your interests.

Of course, if there were no issues of under-insurance and the policy covered the entire claim, then in the event that the policy responds, it is unlikely that you would need to appoint your own lawyers.

Andrew Probert
Insurance and reinsurance
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.