Underinsurance remains a problem for many, particularly those with older houses.

If you have a mortgage, it's likely your lender will insist the house is insured. But for many consumers, it is money poorly spent.

When Cyclone Larry destroyed much of Australia's commercial banana crop in March 2006, it also delivered a lesson for Australian home owners and their insurers.

The Australian Securities and Investments Commission (ASIC) found that about 50 per cent of the homes affected by Cyclone Larry were under-insured. It also found that building costs increased by at least 50 per cent immediately after the disaster.

Many older homes were completely ruined and insurance payouts sometimes did not cover the increased cost of building new homes according to new, safer building codes.

"In a major event like that, there is going to be a drain on resources," says Paul Gladman, the general manager of insurance at CommInsure.

"Prices go up and there are just not enough people to get the work done, even if it's not a major rebuild."

But the possibility of friction between the insurers and those making a claim was a major reason behind CommInsure's decision to introduce a total replacement policy for homes.

"It means that if your house is burnt to the ground, we will have it rebuilt," Gladman says.

AAMI is another insurance company offering a total replacement policy for the building (but not contents).

"We guarantee to rebuild to the same standard regardless of the cost," says Christine Elmer, AAMI's national public relations manager.

"It means the customer doesn't have to give us an accurate figure on what the house is worth or what it will cost to replace. It takes the worry out of that assessment."

When it comes to insuring your home, there are two sorts of insurance: one covers the building and the other the contents. Building insurance can come in many forms. The policy may be a sum insured policy, where you nominate the sum and the insurer will pay this amount should your home be destroyed.

A handful of insurance companies now offer a total replacement policy. This means the insurance company will rebuild your home, no matter what the cost.

An extended replacement policy means the insurer will pay extra if the cost of rebuilding has increased. The insurer may fork out an extra 20 per cent over the amount insured.

Insurers also offer indemnity policies. This means the insurer will only pay the value of your house, and the older the house, the less the insurer will pay.

ASIC, in its report Making Home Insurance Better, says many Australians are underinsured - both when it comes to the building and its contents.

Underinsuring, according to Mark Kachor of DEXX&R, is a big problem.

Kachor says: "If you think the premiums are too expensive, think about whether you've got a spare $300,000 to rebuild your home."

He also says that if you insure a $1million property for $600,000, and then sustain $200,000 worth of damage to your home in a fire, you might only be covered for 60 per cent of the cost of that damage.

"The insurance company might decide you are co-insuring because you're so underinsured," he says. "You may not get the money you need."

David Service, a lecturer from the ANU's school of business and economics, says the cost of the premiums does stop people taking out the right amount of cover.

"People think that it would be very unusual for them to lose everything, therefore they only take out insurance to cover things that might be stolen," Service says.

"They rationalise that they can afford a $150 premium, and no more. So that's the cover they get."

But if your house burns down, you have to replace absolutely everything in it, says Nicolas Scofield, a spokesman for Allianz Insurance.

"This means all the linen, the crockery and cutlery, the bedding and all the small kitchen appliances, everything. Not just the clothing, DVD player and the jewellery, which most people think about.

"You have to think about what you have accumulated over many years and have cover for that," he says.

Kachor says there are few complaints lodged about building insurance claims, but this is not the case when it comes to contents insurance. "You have to have receipts, or proof of purchase, and you have to store that in a separate place so that if the house is burnt down, you've still got paper evidence," he says.

Denis Nelthorpe, a consumer lawyer, agrees the cost of the premiums stops some people from taking out cover. But he adds that the limited range of products also affects those who rent, rather than own their own home, and those who might live in public housing.

"There are very few policies for people who rent," he says.

"Generally, the security demanded is much higher than is provided in rental accommodation and in public housing in particular.

"But also, renters are asked to pay premiums that would cover a house if the kitchen burnt down, even though the renter does not own the kitchen. It's like paying for a Mercedes and getting a Volkswagen."

AAMI offers a cheaper policy for a renter that covers fire and theft, the only one in the market, according to Nelthorpe.

No matter which policy you buy, you must make sure you've met the obligations set out in your insurance contract. This includes not leaving your house empty for months on end, making sure that your locks work and, if you have an alarm, putting it on.

More conflict between insurers and insured

There was a massive 44 per cent increase in the number of disputes between consumers and insurance companies over claims for house and contents insurance in 2005-06.

The Insurance Ombudsman Service (IOS), the industry body charged with hearing disputes between consumers and insurance companies, also found there was a 21 per cent increase in the number of claims rejected by insurance companies during the same period.

But although the increase was big, compared with the number of claims made - 2.9 million - the number rejected remains small at 26,990.

Issues that persistently lead to disputes, according to the IOS, include:

■ Failing to turn on the burglar alarm when it is part of the home's security system.
■ Not making sure the policy's value matches the value of goods insured. If you are underinsured, you may not be able to afford to replace your goods.
■ Not alerting your insurer if you get divorced and the house is insured in joint names.
■ Changing the use of your home, such as by taking in student borders. This may breach your insurance as the insurance company may see your home as a boarding house and no longer just a family home.
■ Leaving your home empty for more than 60 days, which will void most policies.
■ Not making sure that anyone you invite into your home is trustworthy. Goods stolen by guests may not be covered by your policy.
■ Not making sure you have specific cover for valuable items, such as jewellery or expensive designer clothing.