The Risk of Underinsurance for your Commercial Property

Underinsuring your Commercial Property

Your commercial property is your biggest value asset! Yet many of us are guilty of taking risks and underinsuring our properties, creating a rising threat in Underinsurance. Unfortunately it’s only when you need to make a claim does the hidden risks of Underinsurance come to light and it’s all too late to avoid the pitfall of Underinsurance.

What is over and Underinsurance?

Over insured means you’re paying too much, but underinsured means you’re not covered enough for the cost of rebuilding your property which can hit your business much harder, leaving you covering the remaining cost of a shortfall yourself.

What is 'Average Clause'?

Should you find your commercial property underinsured, in the event of an insurance claim your insurer can reduce your claim pay out by the percentage you’re underinsured by. Meaning a claims settlement could be reduced by thousands (and sometimes millions) of pounds, leaving you to fund the difference to rebuild your business premises.

Example of 'Average Clause'

If you’ve only insured your building for £500,000 and the rebuild cost is calculated at £1,000,000, you would have insured your building for only 50% of what the true rebuild cost would have been. Should the unthinkable happen and you need to make a claim for a total loss for example a fire, or even for minor building damage claims, your insurer will only pay out a partial payment of what it would cost to rebuild. In this instance, 50% would be paid out as the building wasn’t insured for the correct amount. We call this the dreaded 'Average Clause'!

How can I be Underinsured?

  • Market value: A common mistake is insuring what the building would sell at market value, rather than its true reinstatement cost to rebuild the property from scratch.

  • Automatically renewing: Renewing an insurance policy every year without reviewing the levels of cover is a common misconception leaving gaps in cover. Many changes can happen during the course of a year such as property extensions or alterations, these can impact the true reinstatement cost of your property. Reviewing your insurance policy each year with an insurance broker can help to identify gaps of cover in your insurance.

  • Mid-term changes: If changes or alterations/extensions have been made to your property before your insurance renewal date you should advise your insurer as soon as these changes are made rather than waiting for your renewal to avoid gaps in cover.

  • Out of date property valuations: A true reinstatement cost for a property should be by a qualified building surveyor to help avoid a shortfall in cover.

  • Insufficient business interruption: Recovering from a total loss such as a fire or flood can be a lengthy process and may take longer than you think to rebuild from scratch with some cases as long as 24 months. Having your property surveyed by a quality survey engineer can give you an estimated rebuild period, which helps you calculate a more accurate Business Interruption sum insured.

  • Insurance market: As the insurance industry has changed significantly over the past few years from a hardening insurance market, Brexit, to Covid-19 and increased energy and fuel prices, businesses are under severe financial pressure, resulting in opting for decreased cover to limit insurance costs.


We recommend our Rebuild Cost Assessment RCA report

At Higos, we’re always looking for ways to improve our service and help protect you and your business from the increased risk of Underinsurance. From industrial estates, shops and offices, to factories, property management and garages, in our experience, no two business premises or their rebuild costs are ever exactly the same. So to help put your mind at rest we can provide our cost effective Rebuild Cost Assessment (RCA) report which is ‘Regulated by RICS’ (Royal Institution of Chartered Surveyors) to help ensure your commercial building is thoroughly protected. Our Rebuild Cost Assessment (RCA) report is a desk based assessment or site visit and can also include an estimated rebuild period, which can help you calculate more accurately for Business Interruption, leaving you with a huge amount of value and protection.

Underinsured, over insured? We’ll let you know

If you’re interested in speaking to a chartered insurance broker to help protect your business property from underinsurance get in contact with us at Higos. Alternatively fill out our online request a call-back form and a member from our specialist commercial insurance team will call you back.

What Does it Mean to Be Underinsured?

Contact us

Give us a call on 01458 270323 if you have any questions or click the 'request a callback' button.