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What is underinsurance?

What is underinsurance?


What is Underinsurance?

Here are some important Statistics on underinsurance of commercial buildings before we explain – this is not just limited to commercial property it should be noted. Underinsurance affects all property owners, either COMMERCIAL or RESIDENTIAL!

  • Around 90% of buildings are insured for the wrong amount
  • 8 out of 10 buildings are insured for 60% of what they should be

Underinsurance can mean you will not be paid for the full value of your claim if you are ever in the unfortunate position of having to make one! It can be costly to you & even catastrophic. The next time you review your insurance policy for your Commercial Building, please ensure you are not underinsuring. Below are some important points as well as a short video to help explain.

 When does Underinsurance occur?

Let’s says you own a Commercial building in the city. You rent it out to a tenant on a long lease. You have insured through the same broker for the last 10 years, and then the unimaginable happens – The building goes on fire. After emergency services are summonsed and the dust has settled, one of the first calls you will have to make is to your Insurance Broker or the insurer itself.

The insurer will send out a Loss Adjuster, and after their survey you hear the dreaded word from the claims handler, “Underinsurance.”  Or maybe you think it is not such a big issue? There lies the problem in Commercial Buildings Insurance today – too many people are simply not aware of the repercussions and the seriousness of underinsurance. We have a short video from that will help explain the important parts of underinsurance and you can view it below.

What actually is it?

Underinsurance is when you insure your Property (for example) for less than the amount it would cost to reinstate it. Let’s say the building costs £1,000,000 to rebuild and it is insured for £600,000 – it is therefore underinsured by £400,000. If the build has had a fire and has burned to the ground, this will leave the insured in a terrible position having to find £400,000 to have the property reinstated.

Do not insure your building for the Market Price?

This is a common mistake. Market prices fluctuate and can have large spikes and falls according to many economic factors. The rebuild cost will general be much more constant – it will include the likes of professional fees (architects for example), debris removal costs and the cost of bricks and mortar to keep it simple. Rebuild costs normally increase each year from anywhere between 1% – 7%, but it should not spike or fall like market costs.

How do you make sure you are not underinsured?

The short video will explain all. We also recommend you get a survey on the property carried out to make sure you get a correct up to date reinstatement valuation if you are not sure.

Property Insurance Centre are Commercial Buildings Insurance specialists and have been insuring all types of Commercial Buildings Insurance London and the UK for over 40 years. We have access to a large panel of A+ Rated Insurers to provide the best cover.  Call us on 0800 085 3761 to speak with a Qualified Staff member.

Short Video on Underinsurance & How to avoid it!

Index: BCIS House Rebuilding Cost Index

BCIS calculates the House Rebuilding Cost Index for the Association of British Insurers (ABI). Most domestic house insurance policies require that the sum assured is the full rebuilding cost of the property.

It is the responsibility of the insured to get this figure right and to keep it up to date. Domestic buildings insurance policies are generally index linked and the House Rebuilding Cost Index is an appropriate index that is widely used for index linking the sum insured between annual revisions of the policy.

The index is also used for updating the sum insured from one year to the next as the policy is renewed, but BCIS recommends that the rebuilding cost is checked regularly (at least every five years), rather than relying on index linking over long periods. The index is based on an average of house types. Therefore it cannot exactly reflect changes in all rates from the house rebuilding cost tables as regional trends, labour and materials contents differ.

The table below shows annual percentage increases in the index.

Month20112012 2013201420152016201720182019
February4.1%3.9%1.8%2.3% 5.4% 4% 3.4%3.9%3.2%
March4.1%3.9% 1.7% 2.4% 5.3% 4%3.6%4.2%2.8%
April5.6%2.5% 1.3% *4.2% 4.4% 3.5% 3.8%4.0%3.0%
May7.3%1.1% 1.3% 4.3% 4.3% 3.5%3.9%3.9%3.0%
June7.3%0.8% 1.7% 5.4% 3.1% 3.4%3.9% 3.9% 2.9%
July5.4%1.3% 1.7% 7.0% 3.2% 1.9%4.9%3.8% 3.0%
August5.2%1.3% 1.6% 7.0% 3.1% 2.9%4.1%3.8% 3.0%
September5.2%0.4% 1.9% 6.6% 3.2% 3%4.2%3.5% 3.4%
October4.2%0.6% 2.2% 6.3% 4.4% 1.8% 4.1%3.5% 3.4%
November4.6%0.9% 2.2% 5.7% *4.5% 2.6%3.5%3.5% 3.2%
December4.4%1.2% 2.3% 5.5% 4.4% 2.8%3.3%3.6%


This table & guidance above has been published by Royal Institute of Chartered Surveyors. So if you have the same Building Sum Insured over the last few years, just have a look at this table and seriously consider getting this checked to make sure you are not under insured!