News & Insights

Underinsurance of commercial property

Underinsurance is all about not taking out insurance to the right level – you insure something for less than its true replacement value.

Let’s imagine you own a commercial property worth £5m. You consider that it would cost about £2m to rebuild it if it were to be destroyed by fire. In reality, the actual cost of rebuilding would, if accurately assessed, be more like £4m. If the worst were to happen then you’d think you’ll get your £2m of insurance proceeds. The reality is far from true. You’ll actually receive more like £1m or you could possibly even be left without anything.

Understating the replacement value of commercial property can lead to your insurer ‘voiding’ the entire policy or policies will more than likely have an ‘average clause’ which means that the insurer can reduce its liability for a claim by applying a proportionate settlement so in our example the building is underinsured by 50% and so the claim will be reduced by the same amount.

It is estimated that about 80% of commercial property in the UK is underinsured. One of the reasons for this is the recent inflationary episode which has had a particularly significant impact on build costs. Regular valuations will help to ensure that properties are insured for their correct reinstatement values and thus avoiding underinsurance risks.