Why sum insured matters
The sum insured is the maximum amount an ISR policy will pay in the event of a claim. Get the figure close to the actual replacement value and the policy responds the way it was designed to. Get it wrong, even slightly, and the claim can land well short of what you expected, even on partial losses.
This is because most ISR policies include an averaging (co-insurance) clause. ISR averaging is generally measured against the declared values you provide at inception, not the sum insured (which is the overall policy limit and is often set higher to allow for inflation). If your declared values fall below the level your wording requires, commonly a stated percentage such as 85% of the actual value at risk at the time of loss, the insurer can reduce your claim proportionally. The exact trigger and percentage vary by wording and insurer, so check your schedule.
How averaging works
Here’s a simplified example:
- Your building’s replacement value is $2,000,000
- You declared its value at $1,500,000 (75% of the actual value)
- You suffer $400,000 in fire damage
Where a wording applies average on a pure proportional basis, the insurer could reduce a $400,000 partial loss to around $300,000 (75% of the claim), leaving you to bear the remaining $100,000. Many ISR wordings only apply average once declared values fall below a stated percentage of value at risk (commonly 85%), so whether average applies, and by how much, depends on your specific wording. This is an illustration only.
Average can apply even to partial losses, which is why accurate declared values are critical.
What to include in your sum insured
Building sum insured
Your building sum insured should reflect the full replacement cost to rebuild the property, including:
- Demolition and debris removal
- Architect and engineer fees
- Council and compliance costs
- Building regulation upgrades required under current codes
- Temporary fencing and site security during rebuild
This is not the market value or purchase price of the building. Replacement cost is often higher because it includes all the ancillary costs of rebuilding from scratch.
Contents sum insured
Contents includes everything inside your building that isn’t part of the building structure:
- Furniture, fixtures, and fittings
- Office equipment and IT hardware
- Plant and machinery
- Tools of trade
- Tenant’s improvements and fit-out
Value contents at their replacement cost, what it would cost to buy the same (or equivalent) items new today. Whether a claim is settled new-for-old or on an indemnity (depreciated) basis depends on your schedule and the reinstatement conditions in the wording.
Stock sum insured
Stock should be declared at the maximum value you hold at any point during the year, not the average, and valued on the basis your wording requires (often cost or landed cost rather than selling price). Consider:
- Seasonal stock peaks
- Raw materials, work-in-progress, and finished goods
- Stock held at other locations or in transit (if covered)
Business interruption sum insured
Business interruption is typically insured based on gross profit - which in insurance terms means revenue minus variable costs (not the accounting definition of gross profit).
You’ll also need to choose an indemnity period - the maximum time your business interruption cover will pay out. This should reflect how long it would realistically take to fully restore operations after a worst-case event.
Common mistakes
- Using market value instead of replacement cost for buildings
- Forgetting ancillary rebuild costs like demolition, fees, and compliance
- Insuring stock at average levels instead of peak
- Choosing too short an indemnity period - 12 months is rarely enough for major property damage
- Not updating sums insured annually for inflation, renovations, or new equipment
Get it right
The best way to ensure accurate sums insured is to get a professional valuation for your building and have your broker review your contents, stock, and business interruption figures annually.
If you’re unsure whether your current sums are adequate, talk to our team. We review ISR policies every day and can identify potential underinsurance risks before they become a problem.