I know with the under-insuring thing it causes issues for huge claims. I work for an insurance company and there was a big pub in QLD that got totally wiped out with the cyclones in 2006 and they were really under-insured. I remember hearing the claims person saying that they didnt pay out the entire claim because of that. I'm talking about a building that was in the $millions to replace/rebuild though - one of those quite large old 2 storey heritage style pubs with a few bars, rooms, and accommodation. Its called averaging provision. Not all insurance companies have this as a condition though, it depends on the underwriters rules so you really need to ask them what would happen in a situation like this. I'm not sure if it would apply to a smaller policy for, say, home contents.

If you overinsure, you can only get back as much as what it costs to replace/reinstate/rebuild what you lost (depending on exactly what your policy is for - replacement and reinstatement are differnt things). Depend on what the assessor or claims adjuster says. Its better to insure your contents for what it would cost if you had to replace it (buy a new one). Like, we've been given things (my mum bought a laptop for me) so that was no cost to ME however, if it got stolen or damaged because of a fire or whatever, it would cost me to replace it, so I'd have to increase my contents to account for that.