Why Underinsurance Hits Harder on an Industrial Building or Factory

Underinsurance costs more on an industrial building or factory than it does on a smaller commercial property, in dollar terms, even at the same percentage shortfall. A 20% gap on a small retail shop is a modest number. The same 20% gap on a large-footprint factory is a much bigger one, simply because the total rebuild cost starts so much higher.

What is underinsurance for a commercial building?

Underinsurance is when the sum insured on a policy sits below the actual cost to rebuild the property. For an industrial building or factory specifically, that rebuild figure can run well above what an owner assumes. The scale of the structure, the flooring, the wiring and the plumbing all add up faster than a simple estimate suggests, on top of the general cost of commercial construction. Construction costs generally have moved a long way in a short time too. The Insurance Council of Australia reported building costs up almost 30% over the five years to 2026, with some regions up over 40% and individual materials like roofing and concrete rising even further.¹ Commercial and industrial construction faces many of the same labour and material cost pressures behind that figure.

How does the average clause actually reduce a claim?

Many commercial property policies apply an average clause. It reduces a claim in proportion to how far the sum insured falls short of the real rebuild cost. That reduction applies to a partial claim just as much as a total loss. This is the detail that catches owners out. It’s one we see come up often when reviewing cover for these buildings. A building doesn’t need to be destroyed for underinsurance to bite. A storm, a fire in one section or a water damage event can all be reduced under the same clause.

Why does this hit harder on an industrial building or factory specifically?

Because the same percentage shortfall scales with the size of the building. A 20% gap on a smaller commercial property is a modest dollar figure. The same 20% gap on a large-footprint factory or industrial building, where the total rebuild cost starts much higher to begin with, turns into a far bigger number. The proportion looks the same on paper. The real dollar exposure isn’t.

What makes rebuild costs harder to estimate for these buildings?

A simple cost-per-square-metre figure can miss what actually drives a factory or industrial rebuild cost: reinforced flooring built to carry heavy machinery, the wiring and plumbing needed to run it and fixed plant installations. Extrapolating from floor area alone tends to understate the real figure, which is exactly how a sum insured can drift below the actual rebuild cost without anyone noticing until a claim is made.

How can an owner avoid being caught out by this?

Reviewing the building sum insured at each renewal against a proper rebuild cost assessment, rather than an old figure carried over year to year, is the practical starting point.² For a commercial strata scheme with an industrial component, the same review applies at the scheme level, since the same average clause mechanics sit behind that cover too.

Key Takeaways

The information in this article is general in nature and does not constitute legal, financial or insurance advice. Please speak with a qualified adviser about your specific circumstances.

Footnotes

1. Cost of building a home rises almost 30 per cent in five years, Insurance Council of Australia finds, ABC News ↩

2. The risk of underinsurance, Insurance Council of Australia ↩