Insurers have been reluctant to push homeowners to get extra cover which many might need, for fear they will shop around, says a Treasury report.
The report also found up to 85 per cent of homes could be under-insured by an average of 28 per cent.
Changes introduced after the Canterbury earthquakes at the behest of global reinsurers mean customers must now say how much it would cost to rebuild their property to the same standard.
Previously, homes were insured for an unspecified full replacement cost.
Insurance companies provide online calculators to help figure out rebuild costs, but say those who struggle to use them should hire a professional.
Despite the problems with under-insurance, the June 2015 report to Finance Minister Bill English did not recommend Government action.
That was because most houses in an earthquake area would not suffer damage to the limits of their cover.
A summary of Treasury's findings was published in May, but the full report has now been made available under the Official Information Act.
It says insurers were reluctant to push additional cover because of three main reasons:
• Concern about appearing to "up-sell", particularly because insurance premiums have doubled in recent years;
• Limitations imposed on advice that can be given without a licence or qualification;
• Some insurers expressed concern that making the renewal process more complicated "might drive customers to start comparing providers rather than staying with their existing insurer". This was despite an extra $100,000 cover costing as little as $45 a year.
Consumer NZ chief executive Sue Chetwin said insurance companies had rejected an approach from her organisation to set up a price comparison website.
Insurance Council chief executive Tim Grafton said insuring was usually too complex to be properly compared in such a way.
He rejected Treasury's finding that insurers weren't selling additional cover because of concerns about price comparisons.
"Treasury may have spoken to one or two individuals lower down the pecking order within their insurance companies.
"But actually that is not a good enough reason at all for not doing your best for your customers."
Grafton said steps had been made to improve valuations, and many policies now came with 10 per cent extra rebuild cover for free.
Minister Responsible for the Earthquake Commission (EQC) Gerry Brownlee said he knew some people had struggled to accurately value a rebuild, but the obligation was the policy-holder's.
"We haven't moved yet to change the EQC legislation because I was very keen to see how, over a longer period of time, the sum insured market might develop."
• Most home insurance policies have moved to a capped "sum insured" value, with customers having to say how much it would cost to rebuild.
• That has led to widespread under-insurance. Some insurers were reluctant to push consumers to take out additional cover in case they compared providers, a Treasury report has found.