The under-insurance of Dunedin's homes could total billions with as many as 85% of homes uninsured by about quarter of their value.
A report by Treasury senior analyst James Sergeant showed under-insurance throughout New Zealand totalled an estimated $184billion.
Issues with under-insurance arise when the cost to rebuild exceeds the "sum insured'' cover.
Most major New Zealand insurers moved to "sum insured'' cover for home insurance policies rather than "full replacement'' following the 2011 Canterbury earthquakes.
Mr Sergeant said he did not complete a regional analysis of the issues surrounding under-insurance.
However, Dunedin contains 2.87% of the country's dwellings and 2.83% of the population.
Those measures would suggest Dunedin's homes were collectively under-insured by between about $5.2billion (per capita basis) and $5.28billion (per dwelling basis).
Mr Sergeant said the figures provided a "very rough estimate'' of the problem in the city.
But many variables affected the level of under-insurance.
Issues such as hilly suburbs' difficult terrain and South Dunedin's groundwater issues might mean the cost to rebuild exceeded expectations.
"The evidence shows that many homeowners are not willing or able to calculate an accurate rebuild cost for their home,'' Mr Sergeant said.
"This can be a difficult calculation as, in the worst cases, the costs may involve total demolition, removal of the rubble and rebuilding a new home that is compliant with the current building code.
"Therefore rebuilding costs often exceed the market value of the existing dwelling.''His research, which included accessing information from insurers, brokers and valuation consultants, found a total of 85% of homes could be under-insured by an average of 28% of their rebuild value.
"We concluded that under-insurance was a real issue across New Zealand,'' he said.
"The estimates spanned a wide range, both in terms of the number of homes affected, and the amount of under-insurance.
While the figures were large, they overstated the risk, as the full value of under-insurance would only be realised if every house in New Zealand was damaged beyond repair.
The modelling Treasury carried out - a magnitude 7.5 earthquake on the main Wellington fault - showed a $135million shortfall would result.
"Most homeowners - 95% - would not experience a shortfall at all, but the impact on some households would be severe, with several thousand households facing an average shortfall of around $40,000,'' Mr Sergeant said.
Insurance Council of New Zealand chief executive Tim Grafton said people should not be alarmed by the figures presented by Treasury's research, as those scenarios would never eventuate.
However, for the "cost of a cup of coffee a week'' people could buy themselves peace of mind by adding about $100,000 cover to their home insurance policy.
A number of free online calculators could help people estimate the cover they required to rebuild their home or they could contact a quantity surveyor to carry out an assessment if they wanted a more accurate figure, he said.
People should make inquiries to see if their insurance coverage was appropriate and the best fit, as some insurers still provided "full replacement'' policies, he said.
