Underinsured Motorist Coverage in Australia 2025: What Drivers Need to Know

Picture this: You’re stopped at a red light, minding your own business, when another driver rear-ends your car. The damage is significant—and so are the medical bills. But when you check the other driver’s insurance, you discover it barely covers a fraction of your costs. This is where underinsured motorist coverage comes to the rescue, and in 2025, it’s more relevant than ever for Australians.

What Is Underinsured Motorist Coverage?

Underinsured motorist coverage (UIM) is designed to protect you when you’re involved in an accident with a driver whose insurance isn’t enough to cover your losses. While compulsory third party (CTP) insurance is mandatory in Australia, it only covers liability for injuries to others—not property damage, and not always for the full scope of medical costs. With accident-related expenses climbing and more drivers opting for basic cover, UIM is fast becoming a critical financial buffer.

Protection beyond CTP: UIM steps in where the other driver’s insurance falls short, paying for your medical bills, lost wages, and sometimes vehicle repairs.
Applies to hit-and-run incidents: If the at-fault driver can’t be identified or is uninsured, UIM can provide essential cover.
Optional add-on: UIM is typically available as an optional extra with comprehensive or third party property insurance policies.

2025 Trends: Why the Need for UIM Is Growing

Several developments in 2025 are making underinsured motorist coverage especially important for Australians:

Rising medical and repair costs: The average cost of a car accident injury claim has jumped by over 12% since 2023, driven by inflation and advances in medical technology.
Increase in basic cover policies: More Australians are choosing minimal insurance to save on premiums, meaning a higher risk of encountering an underinsured driver on the road.
Electric vehicle (EV) repairs: With EV sales surging, repair costs for these vehicles are higher than for traditional cars, making underinsurance gaps even more significant.
Policy updates: In NSW and Queensland, 2025 regulatory changes have prompted insurers to clarify UIM offerings and streamline claims for policyholders hit by underinsured motorists.

Case in point: In February 2025, a Sydney driver faced $28,000 in medical and car repair costs after being hit by a motorist with only basic CTP. Thanks to UIM, she recovered the shortfall her insurer couldn’t collect from the at-fault driver.

How to Make Underinsured Motorist Coverage Work for You

Getting the most from underinsured motorist coverage isn’t just about adding it to your policy—it’s about understanding the fine print and matching your cover to your risk profile. Here’s how:

Review your current policy: Not all insurers offer UIM as standard. Check your product disclosure statement (PDS) or ask your provider if you’re unsure.
Assess your exposure: Do you drive in areas with high accident rates, or where hit-and-run incidents are common? Do you own a newer or more expensive vehicle?
Choose adequate limits: Some policies cap UIM payouts at $200,000, but with medical and repair costs rising, consider opting for higher limits if available.
Understand the claims process: Insurers now offer digital claim lodgement and fast-tracking for UIM claims—a direct response to customer demand in 2025.

Pro tip: Bundling UIM with your comprehensive cover often qualifies you for multi-policy discounts, keeping your premiums competitive.

The Bottom Line: Don’t Let Gaps in Others’ Cover Cost You

With more drivers underinsured and accident costs at record highs, underinsured motorist coverage is no longer just a nice-to-have. It’s an essential part of a smart financial safety net for every Australian motorist. As insurance offerings evolve in 2025, now is the time to review your policy and ensure you’re protected—no matter who’s at fault on the road.

Real-Life Scenarios: The Impact of Underinsurance

Understanding the importance of underinsured motorist coverage can be greatly enhanced by examining real-life scenarios where such coverage has made a significant difference.

Scenario 1: The Urban Commuter

Consider Jane, a Melbourne-based professional who commutes daily through the bustling city. One morning, her car was sideswiped by a driver who fled the scene. With only the basic CTP cover, the other driver’s insurance was insufficient to cover Jane’s medical expenses and car repairs. Fortunately, Jane had opted for UIM, which covered the $15,000 shortfall, allowing her to focus on recovery without financial stress.

Scenario 2: The Family Road Trip

During a family road trip in Queensland, the Smiths’ vehicle was rear-ended by a tourist with minimal insurance coverage. The accident resulted in significant damage to their SUV and medical costs for the family. Thanks to their comprehensive policy, which included UIM, the Smiths were able to claim $25,000, covering all their expenses that the at-fault driver’s insurance did not.

Navigating the Insurance Landscape: Expert Tips

Navigating the complexities of insurance can be daunting. Here are some expert tips to ensure you make informed decisions regarding underinsured motorist coverage:

Understanding Policy Terms

Product Disclosure Statement (PDS): Always read the PDS carefully to understand what your policy covers and any exclusions.
Seek Professional Advice: Consider consulting with a financial advisor or insurance broker to tailor your coverage to your specific needs.

Regular Policy Reviews

Annual Check-ups: Review your insurance policy annually to ensure it still meets your needs, especially if your circumstances change, such as purchasing a new vehicle or moving to a different area.
Stay Informed: Keep abreast of changes in insurance regulations and market trends, which can affect your coverage needs.

FAQ

What is the difference between uninsured and underinsured motorist coverage?

Uninsured motorist coverage protects you if you’re involved in an accident with a driver who has no insurance. Underinsured motorist coverage, on the other hand, applies when the at-fault driver has insurance, but it’s insufficient to cover all your expenses.

How do I know if I need underinsured motorist coverage?

Consider factors like your driving habits, the value of your vehicle, and your financial situation. If you frequently drive in high-risk areas or own an expensive vehicle, UIM is advisable.

Is underinsured motorist coverage mandatory in Australia?

No, underinsured motorist coverage is not mandatory. However, it is highly recommended as an optional add-on to provide additional protection.

Sources

Australian Securities and Investments Commission (ASIC) - For information on insurance regulations and consumer rights.
Australian Competition and Consumer Commission (ACCC) - For guidance on fair trading and consumer protection in insurance.
Insurance Council of Australia - For industry updates and insurance advice.

By considering these practical examples and expert tips, Australian drivers can make informed decisions about underinsured motorist coverage, ensuring they are well-protected on the road.

Worked Example

For example: compare two products with the same monthly cost but different fees. A slightly higher headline rate can still be cheaper once annual fees and penalties are included.

FAQ

How often should I review this type of product?

At least once per year and again when your circumstances change.

What should I compare first?

Start with eligibility, total costs, key exclusions, and cancellation terms.

Where can I verify guidance?

Check official Australian regulators and government websites before making decisions.

Sources

Further Authority Links

Australian Regulatory Checks

Use ATO, ASIC, APRA, RBA, and ACCC publications to verify obligations, risk warnings, and current policy settings.