Commercial Property Underinsurance: Avoid Costly Claim Reductions

When it comes to insuring a property, choosing the right sum insured is essential. Research indicates that 93% of properties in the UK are insured for an incorrect amount, with 70% of these likely being underinsured.¹ Now is the perfect time to check that your insurance coverage matches your property’s reinstatement value or insured value so you’re not left short at claim settlement time. Accurate cost assessments and professional valuation are key to ensuring your insurance cover reflects the true replacement cost of your physical assets.

What is underinsurance?

Underinsurance happens when the insured amount on a property is less than the actual value or the true cost needed to rebuild or restore it. This situation can arise for a few reasons. For instance, a property might be insured based on its purchase price or market value instead of its full value or reinstatement value. This reflects the true cost to rebuild the property from the ground up. Additionally, if the regular valuations are outdated, external factors can cause the real rebuild expenses to be higher than initially estimated, including:

Rising costs
Material costs
Building materials shortages - often exacerbated by supply chain disruption.

It's important to keep valuations current and consult with professional brokers or chartered surveyors to avoid underinsurance risks. This ensures adequate insurance levels for your UK commercial properties.

The condition of average: how it affects your claim

Many buildings insurance policies include a clause known as the condition of average. This clause is designed to ensure that the insured amount reflects the true value of the property. If you're underinsured, the condition of average means your claim settlement payout will be reduced proportionally to the percentage of underinsurance. This could potentially cause a significant financial loss and additional financial burden.

For example, if your property is insured for only 50% of its true rebuild cost, your insurance company will only pay 50% of any claim amount. This can lead to potential delays in rebuilding and serious business interruption. This could threaten your business operations and even result in business closure. The serious consequences of underinsured buildings highlight the importance of maintaining full value coverage. Being fully covered protects your financial stability and avoids the average shortfall.

A practical claim example

Suppose your property is insured for £500,000, but the actual rebuild cost is £1 million. If you make a claim for £100,000 in repairs, the insurer would apply the condition of average and pay only 50% of that claim - £50,000. This would mean you would have to cover the remaining £50,000 yourself. This significant risk can have a serious financial impact on commercial property owners and UK businesses. This is becoming more prevalent as natural disasters and other external factors are affecting more UK businesses.

In some cases, if the underinsurance is significant or policy terms are not met, insurers may even void the policy. This could result in no payout at all. This highlights the importance of fair presentation of your insurance information. You need to understand your insurance act obligations to avoid such major loss scenarios.

Underinsurance can lead to unexpected additional financial burden when you need to make a claim. While it might not always be intentional, it’s important to understand that the sum insured should reflect the true reinstatement cost of your property - not the market value or an outdated estimate. Working with an experienced insurance broker can help you identify potential risks and ensure your physical assets are fully covered in the event of a claim.

How to insure your buildings for the correct amount

We’re here to help you calculate the reinstatement value of your buildings with accurate valuations. We can offer:

Desktop valuations for just £150+VAT

Desktop valuations provide a trusted rebuild cost estimate within days, with no site visit required. You'll receive a reliable, insurance-approved assessment and a detailed report to demonstrate to insurers that your property has been professionally evaluated. This is suitable for UK properties insured up to £10 million and owner-occupied residential properties up to £5 million. Note: Grade 1 and Grade 2+ listed buildings cannot be assessed via desktop.

Onsite valuations

Premium onsite assessments are offered for any property that does not fit the desktop criteria. This is often due to an unusual feature of a building, typically found in:

Heritage properties
Large estates
Commercial properties
High-profile venues.

Underinsurance is a risk that can affect many property owners, often unintentionally. The condition of average clause means that if your property is underinsured, your claim payments will be reduced proportionally. To avoid unexpected costs, it’s essential to insure your property for its true reinstatement value and keep your coverage up to date. This is especially important as supply chain issues and rising building materials costs mean that prices start to increase, impacting rebuild expenses.

Watch our short video on the importance of getting the reinstatement value correct. If you have questions about your property insurance or want to review your coverage, don’t hesitate to contact your Marsh Commercial advisor or email riskmanagement@marsh.com. Proper protection today can help you avoid costly surprises in the future and make informed decisions as your business grows.

Sources

1. rebuildcostassessment.com/2025-property-insurance-infographic

Download our brochure on how to decide the reinstatement value of your property and avoid underinsurance.

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