When it comes to insurance, there are certain areas that are frequently misunderstood or overlooked by business owners. Among the most critical is the issue of underinsurance. Unfortunately, this misunderstanding can carry severe financial consequences if left unaddressed.
At McClarrons, we know that insurance should never be considered a tick-box exercise; our approach is built around education, partnership, and specialist advice that allows clients to make informed decisions about their insurance cover. One particularly high-risk area is when it comes to the rebuild cost of your commercial property – a detail that might seem minor at the time of setting up a policy, but can be pivotal in the event of a claim.
The Issue of Underinsurance in the UK
A staggering 76% of UK properties are underinsured according to Rebuild Cost Assessment data. This statistic underscores a widespread and risky misconception: that the value paid for a property, or a rough estimate based on neighbouring buildings, is an acceptable basis for insurance cover. In reality, this approach can leave policyholders exposed and significantly out of pocket if disaster strikes.
In the event of a claim, insurers use a mechanism called the ‘Average Clause’ to address underinsurance. This clause proportionately reduces a claim payout if the insured value of the property is found to be below its actual rebuild cost. The logic is simple – if you only pay to insure 60% of your property’s value, you will only receive 60% of any claim amount. This can lead to devastating financial shortfalls at the worst possible time.
Two Journeys, Different Outcomes: Two Tales of Underinsurance
To illustrate the real-world impact of underinsurance, let us explore two case studies which lead to different possible outcomes.
Case 1:
A small café owner comes across a McClarrons press release and gets in touch for a commercial insurance quotation.
Background
As part of the review process, McClarrons advises the client that the rebuild value, rather than the purchase price, of the café’s premises must be declared for the property insurance. They recommend obtaining a RICS-approved rebuild valuation survey to ensure accuracy and avoid the pitfalls of the Average Clause.
Scenario 1: The Estimated Shortcut
The café owner, pressed for time and costs, decides not to pursue a professional valuation. Instead, they consult a neighbouring café owner with a similar property, who mentions that their building is insured for £150,000. Confident that this estimate is “close enough,” the client provides this figure to McClarrons without further validation.
Outcome 1:
A few months later, a fire breaks out in the café kitchen, causing damage totalling £100,000. When the claim is submitted, the insurer’s loss adjuster discovers that the actual rebuild value of the café is £250,000, meaning the property was underinsured by 40%. Applying the Average Clause, then, the insurer pays out just £60,000, leaving the client to find £40,000 from their own funds to cover the shortfall to make repairs.
Scenario 2: An Informed Choice
Here, the café owner acknowledges McClarrons’ advice and agrees to undertake a virtual RICS-approved rebuild valuation. The survey determines that an accurate rebuild cost is £250,000, and this figure is used for the insurance policy.
Outcome 2:
When the same £100,000 fire loss occurs as in Scenario 1, the insurer validates the claim and confirms that the property was correctly insured. With no underinsurance present and all policy conditions met, the claim is paid out at the full, £100,000, enabling the business to recover swiftly and without additional financial burden.
Case 2:
A nursing home reaches out to McClarrons after hearing about our work with other care sector businesses.
Background:
During the review, we explain that for property insurance, it’s the rebuild value — not the market value — that matters. To get it right, we recommend a RICS-approved rebuild valuation survey so they can avoid the risk of underinsurance and the impact of the Average Clause.
Scenario 1: The Costly Oversight
The management team, feeling their current cover was “about right,” choose not to get a professional valuation. Instead, they stick with an old figure of £3 million from when the policy was first set up, thinking it will do for now, and they can review it next year. Confident it’s close enough, they give this figure to McClarrons without digging deeper.
Outcome 1:
A severe fire rips through the home, and the total claim, including business interruption, comes to £1.225 million. When the insurer’s loss adjuster investigates, they find the true rebuild cost is £13.75 million, meaning the property was only insured for 22% of its real value (having been insured for only £3 million). With the Average Clause applied, the insurer pays the proportionate amount of the claim due to the underinsurance, which is just a fraction of the total claim. This leaves the nursing home to fund the huge £1,078,000 shortfall themselves.
Scenario 2: The Informed Choice
In this scenario, the management team takes our advice and commissions a RICS-approved rebuild valuation to ensure they are providing an accurate estimate. The survey confirms the correct rebuild cost at £13.75 million, at which point, the management team update the sum insured on the policy to match.
Outcome 2:
When the same £1.225 million fire loss occurs, the claim, providing it is valid and all other policy conditions are met, can be paid in full. There’s no underinsurance in this scenario for the property meaning the Average Clause isn’t applied by the insurer, providing the funds for the nursing home to rebuild and get back to caring for residents without the stress of finding extra funds.
Why Rebuild Value Accuracy Matters
Getting the rebuild value of your commercial property right is not just about securing peace of mind – it’s about protecting the financial future of your business. The rebuild value should include, as a minimum:
- The cost of materials and labour to rebuild the property from scratch
- Demolition and site clearance expenses
- Professional fees (e.g. architects, structural engineers, project managers)
- Compliance with relevant building regulations
A RICS-approved survey can ensure the rebuild value considers these items and is accepted by insurers as a reliable source for an accurate valuation. While some business owners view this step as an unnecessary expense or inconvenience, the cost of a survey – and potential additional premium – pales in comparison to the potential financial hit of a reduced insurance payout. Equally, a valuation may show that you are overinsured, in which case, you can reduce your sum insured and potentially your premium too.
How McClarrons Can Help
At McClarrons, we are committed to delivering specialist advice tailored to the unique needs of businesses. Our experienced team helps every client understand their insurance cover—not just in principle, but in practice. We work closely with trusted surveyors and valuation experts, making the valuation process straightforward and cost-effective for busy business owners.
So you can feel confident you’ve got your sums insured right, we have teamed up with RebuildCostASSESSMENT.com who, regulated by RICS, provide desktop Rebuild Cost Assessments to determine how much you should be insuring your buildings for. This online service provides an alternative to a more in-depth on-site assessment of your property.
RebuildCostASSESSMENT.com prices start from as little as £199.75 but we’ve negotiated a special discount whereby McClarrons clients can receive £20 off when placing an order online. Please get in touch with us if a discounted assessment would be of interest.
Don’t Leave Your Business Exposed
By taking a proactive approach to rebuild valuations, you can secure the right level of cover for your business and gain peace of mind so that should the worst happen, your insurance performs as intended.
Whether you are reviewing your existing insurance or arranging cover for the first time, make sure you’re not one of the 76% who are underinsured. A simple conversation could save your business in the long run.
For guidance on your sums insured or to request a complimentary review, contact McClarrons’ Commercial Team at 01653 609151 or commercial@mcclarroninsurance.com.
