What is Building Underinsurance? (UK Guide)

By Richard Graham, Executive Director, Head of Claims

workers on scaffolding

What is building underinsurance?

Building underinsurance happens when the amount you’ve insured your property for is less than what it would actually cost to rebuild it. This means your insurance may not fully cover repairs or rebuilding after a claim. This can happen if rebuild costs have gone up over time, or if the rebuild cost was never properly checked in the first place.

If you make a claim and your property is underinsured, the payout could be much lower than you need. You would then have to pay the difference yourself, which could run into tens or even hundreds of thousands of pounds.

Underinsurance can affect all types of property, including homes, rental properties, and commercial buildings.

What does building underinsurance mean in the UK?

Building underinsurance in the UK refers to when the sum insured on your policy is lower than the actual cost of rebuilding your property using current market prices. This can include materials, labour, professional fees (like architects, engineers and surveyors), demolition, site clearance and compliance with building regulations.

UK insurers often apply the average clause in relation to underinsurance. This means that if you’re underinsured by, for example, 40%, your claim payout is reduced by the same percentage. This includes if the damage is only partial. This can leave you facing substantial out of pocket expenses.

What is the average clause and how does it work?

What is the average clause and how does it work?

The average clause is an insurance policy condition that reduced the amount of claim payout if a property is underinsured. It’s a formula that proportionally adjusts claims based on how underinsured the property is. 

How it works

If your property is found to be insured for less than the true rebuild cost, the insurer treats you as partially self-insured. They only pay a percentage of your claim – reflecting the proportion of correct cover in place.

Average clause example

  • Sum insured: £350,000 
  • True rebuild cost: £500,000
  • You are underinsured by 30%
  • Claim amount: £100,000
  • Insurer may pay: £70,000 (because you only insured 70% of the true rebuild value)
  • You’ll need to pay: £30,000 (to complete the works and fill the gap left by underinsurance)

Why underinsurance happens

Underinsurance occurs when the level of insurance taken out isn’t enough to cover the true cost of repairing, rebuilding, or replacing what’s insured. It happens more often than people think, and even experienced business leaders may find themselves and their enterprise underinsured due to simple oversights, lapses, or outdated information. Here are some common reasons why underinsurance happens:

  • Outdated valuations

    Businesses commonly rely on old rebuild or replacement cost estimates, meaning sums insured no longer reflect real world costs (like construction or labour costs)

  • Confusion about what to include

    Many policyholders misunderstand what their insurance policy covers and therefore rebuild or replacement valuations are based on incorrect and inadequate costs

  • Growth without policy updates

    Assets increase, revenues grow, buildings are extended, teams expand, machinery gets updated, or stock levels rise, but insurance limits stay the same.

  • Misunderstanding policy terms

    Complex language leads to incorrect assumptions about cover limits, sub-limits, exclusions, or indemnity periods

  • Focusing primarily on premium savings

    Businesses may intentionally choose lower cover to reduce costs, not realising how severely this increases exposure or risk

  • Reliance on outdated or automated cost tools

    Old data or generic online estimators/comparison guides often underestimate rebuilding costs

The true cost of underinsurance: Property, contents and business interruption

An incident at your business has the   potential to create devastating and long term loss.

Valuation data from BCH shows how widespread the issue of underinsurance truly is. Their assessments reveal that 75% of properties they survey are underinsured, meaning most owners would fall significantly short of the funds required to fully reinstate their buildings after a loss.

For commercial clients, the picture is similarly concerning. 59% of businesses were found to be underinsured, with those affected requiring an average uplift of 58% just to reach adequate cover.

Many policyholders assume that index‑linking will automatically keep their insurance sums insured accurate over time - and that this prevents underinsurance. But this isn’t always the case, and it’s important to understand why.

Index linking is an annual adjustment applied by insurers to increase your sums insured in line with general inflation. It helps policies keep pace with rising prices for goods and services, and is often used for buildings, contents, and some commercial products.

While it’s helpful, index linking only tracks broad inflation - not the actual cost of rebuilding a property. In recent years, building materials, labour, energy costs and supply chain pressures have pushed rebuild costs up far faster than inflation. For example, construction and material prices surged due to Covid 19, Brexit and global conflict–related shortages, outpacing normal inflation measures.

The result?

A building professionally valued ten years ago, even with index linking added every year, can still be seriously underinsured today. Index linking is useful - but it is not a substitute for regular professional reinstatement valuations.

Typical scenarios

Here, we break underinsurance down into three typical scenarios, which will give you a clearer picture of what’s at stake if your business is underinsured.

  • 1. PROPERTY: A small fire becomes a big financial problem

    A business insures its building for £600,000 – which was the accurate and professionally assessed rebuild cost ten years ago. After a fire damages part of the premises, a survey reveals the true rebuild cost is actually £1 million. Because the building was underinsured by 40 per cent, the insurer applies the average clause – meaning even a £100,000 repair claim is cut by 40 per cent. The business must unexpectedly cover £40,000 itself.

  • 2. CONTENTS: Stock levels creep up – but the policy doesn’t

    Based on last year’s stock value, a retailer renews its contents cover for £80,000. However, a busy season means the stock is now worth closer to £140,000 – leaving the retailer underinsured by around 43%. When a flood destroys £50,000 of stock, the insurer’s payout was reduced by 43% based on the underinsurance. The insurer pays £28,570, leaving the retailer to make up the remaining £21,430.

  • 3. BUSINESS INTERRUPTION: The business reopens late – and loses customers

    A manufacturer selects a 12 month indemnity period which, to them, “seems long enough.” After a major fire, global supply delays, planning permission holdups, and specialist machinery lead times fail to follow schedule, the much-anticipated reopening takes 18 months. Their business interruption cover runs out six months too early, leaving wages, loan repayments, and lost revenue after than point, completely uncovered – turning what should have been a recoverable setback into failure or a long term financial crisis.

What are the risks of your building being underinsured?

Building underinsurance poses a major risk for any property owner, exposing a hidden vulnerability that only becomes visible when things go wrong. Here are some of the major risks involved:

  • Reduced claim payouts – Even partial claims can be reduced because of the average clause. A business may feel “covered,” but if its buildings, equipment, or stock aren’t insured for their true replacement cost, even a small incident can trigger a disproportionately large financial shortfall.
  • Significant expenses – When claims are reduced through the average clause or limits are simply too low, the business is suddenly forced to absorb costs it never planned for – often at the worst possible time.
  • Delays to repairs or rebuilds – Underinsurance can slow down the claims process, contractor appointments and project timelines. 
  • Breach of mortgage/loan terms – If building insurance is a condition of your mortgage, underinsurance might lead to a breach of terms, lender intervention and difficulty when it comes to refinancing.
  • Business interruption – Many companies underestimate how long it takes to recover after a major event; from rebuilding of the premises and replacing machinery to resolving supply chain delays and obtaining planning approvals. If the indemnity period or financial limits fall short, cash flow dries up just when a business needs it most.

This combination of reduced payouts and prolonged downtime can turn an otherwise survivable setback into lost customers, long term instability, or even closure – making underinsurance the silent threat that no business wants to encounter.

The exterior of a factory

Is underinsurance common in the UK?

Yes - underinsurance is not only common, but a systemic issue affecting both businesses and households. Multiple recent studies show that large portions of the country are exposed to financial risk because their insurance cover doesn’t reflect true rebuild or replacement costs.

Underinsurance is widespread across UK organisations of all sizes, with several independent reports showing the scale of the issue:

  • 75% of businesses are underinsured for a major catastrophic event, according to Gitnux’s 2026 Small Business Insurance Statistics report. 
  • A broader insurance industry snapshot shows even more severe gaps: the 2025 Charterfields Underinsurance Report found that 88% of commercial sites were underinsured on buildings and 77% were underinsured on plant, equipment and contents.

Additionally, other data shows that approximately 70% of UK residential properties are underinsured.

Want to make sure you’re not underinsured?

Make sure you remain fully protected by reviewing your Howden cover today, or speak to your broker to check for any risk of underinsurance.

For added cover confidence, explore our building valuations service with BCH to ensure your property is insured for what it’s truly worth.

Review your Howden cover today

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