If you own a commercial property, having insurance is only half the job. The amount you insure it for matters just as much.
Many UK businesses unknowingly underinsure their commercial properties. As a result, they may not receive enough money to repair or rebuild their premises after a major loss. Whether you own an office, warehouse, shop, industrial unit or mixed-use building, reviewing your commercial property insurance could save your business from a significant financial shortfall.
In this guide, we’ll explain why commercial properties become underinsured, the risks involved, and the practical steps you can take to avoid the problem.
What Does Underinsurance Mean?
Underinsurance happens when the amount your property is insured for is lower than the true cost of rebuilding it.
Many property owners assume they should insure their building for its market value or purchase price. In reality, commercial property insurance should usually be based on the property’s rebuild cost, also known as the reinstatement cost. This includes demolition, debris removal, professional fees, labour and materials needed to rebuild the property after a total loss.
If your sum insured is too low, you may have to pay part of the repair or rebuilding costs yourself.
Why Are Commercial Properties Often Underinsured?
Several factors contribute to underinsurance.
Rising Construction Costs
Building materials, labour costs and contractor availability have changed significantly in recent years. If you haven’t reviewed your policy for several years, your rebuild value may no longer reflect current costs.
Using Market Value Instead of Rebuild Cost
This is one of the most common mistakes.
The market value includes factors such as land value, local demand and location. The rebuild cost only reflects what it would cost to reconstruct the building from the ground up. Depending on the property, these figures can differ substantially.
Property Improvements
Have you added an extension, upgraded the roof, installed new equipment or carried out structural alterations?
Many businesses improve their premises but forget to update their insurance policy. These changes can increase the cost of rebuilding your property.
Automatic Renewals
Renewing your policy each year without reviewing the sum insured may seem convenient, but it can leave you exposed. An annual review helps ensure your cover still reflects your property’s current rebuild cost.
What Happens If Your Property Is Underinsured?
Being underinsured can have serious financial consequences.
Many commercial property insurance policies include an average clause. This allows the insurer to reduce a claim if the building has been insured for less than its true rebuild value.
For example, if your commercial property should be insured for £1 million but your policy only covers £750,000, you are insured for just 75% of the required value. If you make a £200,000 claim, the insurer may only pay around £150,000, leaving your business to fund the remaining costs.
Even relatively small claims can be affected if the average clause applies.
How to Avoid Underinsurance
Fortunately, avoiding underinsurance is straightforward if you regularly review your cover.
Arrange a Professional Rebuild Cost Assessment
A professional reinstatement cost assessment provides the most accurate estimate of what it would cost to rebuild your commercial property. This is particularly valuable for older buildings, listed properties, mixed-use premises and complex commercial sites.
Review Your Insurance Every Year
Don’t wait until renewal to think about your cover.
Review your policy annually and after any major building work, refurbishment or extension. Keeping your insurer informed helps ensure your cover remains accurate.
Keep Records of Property Changes
Maintain records of renovations, extensions and significant improvements. These details make it easier to review your insurance requirements and provide accurate information when arranging cover.
Speak to a Specialist Insurance Broker
Commercial properties vary greatly in size, construction and use. A specialist broker can help you understand your risks, recommend appropriate levels of cover and ensure your policy reflects your property’s true rebuild value.
Why Regular Reviews Matter
Commercial property ownership is rarely static.
Construction costs continue to change, building regulations evolve and businesses invest in improving their premises. Reviewing your commercial property insurance every year gives you confidence that your building remains adequately protected if the unexpected happens.
A small amount of time spent reviewing your policy today could prevent a significant financial loss tomorrow.
Get a Commercial Property Insurance Quote
Whether you own a single commercial property or manage an extensive portfolio, having the right level of cover is essential.
At Insurance Revolution, we can help you arrange commercial property insurance that suits your property, your business and your budget. Our experienced team will explain your options clearly and help you choose appropriate cover with confidence.
Ready to protect your commercial property? Start your quote today and see how Insurance Revolution could help you find the right cover for your business.
Footnotes & Sources
- Association of British Insurers (ABI). Commercial Property Insurance https://www.abi.org.uk/products-and-issues/choosing-the-right-insurance/business-insurance/commercial-property-insurance/
- Royal Institution of Chartered Surveyors (RICS). Why Building Cover Relies on Correct Reinstatement Cost https://ww3.rics.org/uk/en/journals/built-environment-journal/building-reinstatement-cost-assessments.html
- Royal Institution of Chartered Surveyors (RICS). Reinstatement Cost Assessment of Buildings Professional Standard (PDF) https://www.rics.org/content/dam/ricsglobal/documents/standards/oct18_reinstatement_cost_assessment_of_buildings_3rd_edition.pdf