A home can be insured for hundreds of thousands of dollars and still be underinsured.

Underinsurance occurs when the policy limit is not sufficient to meet the full cost of rebuilding, repairing or replacing insured property.

One common mistake is using the property’s market value as the basis for building cover. Market value includes the land and reflects location, demand and local sales. Home insurance is primarily concerned with the cost of reconstructing the building.

That cost can include demolition, debris removal, professional fees, council requirements, materials, labour and temporary accommodation. Difficult access or updated building standards may add further expense.

Renovations and extensions can also make an old insurance amount inadequate. Even when the property has not changed, rising construction costs can reduce the real protection provided by a fixed sum insured.

Underinsurance is not only a concern when a home is completely destroyed.

Some policies contain a coinsurance or averaging clause. Depending on its wording, the insurer may reduce a partial claim if the property was insured for substantially less than its replacement value.

The exact effect depends on the contract. Policyholders should read the product disclosure statement and ask their insurer to explain any clause they do not understand.

Contents insurance requires a separate calculation. Furniture, clothing, electronics, appliances, tools and personal belongings can add up to far more than a quick estimate suggests.

High-value jewellery, art, bicycles or equipment may be subject to individual limits unless specifically listed.

Policyholders should reassess the insured amount at least annually and following major renovations or purchases.

Rebuilding calculators can provide a starting point, while unusual or high-value properties may require professional assistance from a builder, quantity surveyor or valuer.

Consumers should also check whether the policy provides a fixed sum insured or full replacement cover, and understand the exclusions applying to floods, fires and other events.

Increasing the excess can sometimes reduce the premium, but the excess must remain affordable during an emergency.

Photographs, receipts and an updated household inventory can help establish ownership if a claim is later required. Copies should be stored securely somewhere that will remain accessible if the property is damaged.

The cheapest {home insurance} policy is not necessarily the best value. A low premium provides little comfort if exclusions or an inadequate insured amount leave the household unable to rebuild.