Underinsurance at the time of a claim continues to be a significant issue:
- RebuildCostASSESSMENT.com and the Building Cost Information Service (BCIS) indicate that roughly 70% to 75% of commercial properties are underinsured, with buildings typically covered for only 66% to 67% of their true reinstatement value.
- QuestGates and BIBA Facility: QuestGates, managing the British Insurance Brokers’ Association (BIBA) valuation facility, notes that underinsurance remains a persistent issue in a high proportion of cases handled, driven by soaring post-pandemic building inflation.
- FCA and Consumer Complaints: The Financial Conduct Authority (FCA) continues to monitor property and building insurance disputes closely, with thousands of consumer complaints and millions set aside by firms for redress regarding inadequate claims handling and valuation discrepancies.
- Business Interruption Shortfalls: Figures cited by risk management and loss adjusting groups, including Aviva Risk Management Solutions, show that around 44% of business interruption policies are underinsured, with an average shortfall running at roughly 52%.
- Inflationary Pressures: Cumulative construction inflation, high material costs, and ongoing labour shortages since 2020 have substantially increased true rebuilding and repair expenses, outpacing standard policy indexation.
The implications of underinsurance are if a property or business is underinsured at the time of a claim, insurers may apply the condition of average. This means any payout is reduced proportionally to the degree of underinsurance. For example, if a building would cost £1,000,000 to rebuild but is only insured for £700,000 (a 30% deficit), a claim for a £100,000 partial loss may be proportionally reduced by the insurer to roughly £70,000, leaving the owner to cover the remaining balance.
Buildings – the building declared value that you select should represent the rebuilding cost of your property, including an allowance for debris removal/site clearance and an amount for architects, legal and other fees that may be incurred in the reinstatement of the building. Don’t forget external walls, paths, gates, fences, car parks, outbuildings, etc. Special consideration is required for listed buildings. The reinstatement value for your building IS NOT the market value of the building.
Business Contents – the contents declared value should represent the replacement cost of your contents as new – ‘new for old’ basis. If you purchase a second-hand item you should insure the item for the replacement as new cost, not the amount paid for the second-hand item.
Stock – the sum insured should represent the value of all stock and materials in trade (including work in progress) belonging to you, or for which you are responsible (customers’ goods). When setting the sum insured, consideration should be given to the maximum value at risk during seasonal or peak trading periods.
Business Interruption – cover may be arranged on a Gross Profit (may also be known as Loss of Income or Insurance Profit), Gross Revenue or Increased Cost of Working basis, and different sums insured would need to be selected dependent on the basis of cover.
We would stress that if cover is arranged on a Gross Profit basis, your insurance company’s definition of Gross Profit is different to your Accountant’s definition as would be showing in your annual accounts.
Please speak to us for specific guidance.
A downloadable (PDF) underinsurance guide prepared by the British Insurance Brokers’ Association is available here.