Home insurance sum insured: rebuild cost, not value

The sum insured is the amount your insurer will pay, at most, if your home is destroyed and needs to be rebuilt. It sits on the policy schedule, usually on the first page. Everything else (the premium, the excess, the optional extras) flows from it.

Two things make sum insured a persistent source of trouble. First, most people set it once when they take out the policy and never revisit it. Second, the number bears little relation to the property's market value. It should reflect the cost to rebuild the home from the ground up, including demolition, debris removal, professional fees and building code compliance.

Sum insured vs market value

Market value includes the land, the location and the state of the housing market. Rebuild cost is a construction question. In a hot property market the two figures can diverge sharply, and it is not unusual for rebuild cost to be either much lower or much higher than market value depending on the property, the location and how specialised the build is.

How sum insured drifts

• Construction costs rise. Materials and labour costs move independently of house prices. A rebuild figure that was accurate three renewals ago may be visibly low today.
• Extensions and renovations. Any structural change (a new bathroom, an added room, a deck, a pool) should usually be reflected in the sum insured. It often isn't.
• Optional extras get added quietly. Solar panels, rainwater tanks, granny flats, sheds and pergolas are commonly left off older schedules.

Under-insurance and averaging

Many home policies allow the insurer to apply an "average" or "co-insurance" clause when a property is significantly under-insured, reducing partial-loss payouts in proportion to the shortfall. The exact rules depend on the insurer and the wording of your policy, and are the kind of thing worth confirming before you rely on it not happening.

The sum insured is also not the same as the list of insured events. Check whether home insurance covers flood; an accurate rebuild figure does not help if the event is excluded.

Sanity-checking your sum insured at renewal

• Compare the current sum insured with what your insurer's or an industry rebuild-cost calculator suggests for a home like yours. They are estimates, not valuations, but they surface obvious gaps.
• If you've renovated or added anything structural since the last renewal, note it and update the schedule.
• For homes that are unusual (heritage, architecturally significant, on difficult terrain, or built with non-standard materials), consider getting a professional rebuild-cost assessment rather than relying on a generic calculator.

Contents follows the same logic

The contents sum insured has the same problem in miniature. Most people set it once, based on a rough guess, and never revisit it, even after major purchases or, on the other side, after moving to a smaller home. A room-by-room walk-through once a year is usually enough to catch obvious drift.