Underinsurance is a big problem in a time of building materials inflation, higher costs for skilled tradespersons and professional fees and public sector charges for various bits of admin. It all adds up during a claim. Here’s the word;
A staggering eight out of ten commercial properties are underinsured, leaving businesses dangerously exposed to financial loss in the event of a claim, according to Johnny Thomson, Strategic Planning Director at RebuildCostASSESSMENT.com.
With extensive experience in risk management, insurance, and business operations, Thomson warns that underinsurance is a critical issue affecting the commercial property sector. “Most businesses are insuring their properties based on market value rather than the true cost of rebuilding,” he explains. “This oversight means that when a claim is made, many policyholders are left with a significant shortfall—often in the millions.”
RebuildCostASSESSMENT.com’s data, based on hundreds of thousands of property assessments, reveals that on average, underinsured properties are covered for just two-thirds of their actual rebuild cost. The consequences are severe; a commercial property requiring a £10 million rebuild may only be insured for £6.3 million, leaving the business to cover a £3.7 million shortfall in the event of a total loss.
“The issue is exacerbated by the ‘average clause’ found in most insurance policies,” Thomson adds. “Even a partial claim can be proportionately reduced if the sum insured is too low. This means a business making a £10,000 claim could receive only £6,300, significantly impacting its financial recovery.”
Inflation and Rising Construction Costs Worsening the Problem
Recent economic pressures have further intensified the issue, with construction costs rising sharply. “In 2022 alone, construction costs surged by 25%, and during the pandemic, some materials increased in price sevenfold,” says Thomson. “A property that was adequately insured in 2019, could now be dramatically underinsured, leaving businesses exposed to risk they may not even be aware of.”
Why Businesses Get It Wrong
Thomson attributes widespread underinsurance to the way property insurance is transacted. “Policyholders are asked how much they want to insure their building for. It’s their responsibility to provide this.. The result is guesswork and estimates that are often far below the true rebuild cost.”
To illustrate, Thomson likens the process to booking a flight: “Imagine trying to book a trip to the south of France, but instead of selecting a destination, you are asked how many miles you want to fly. Without precise knowledge, you could end up far from where you need to be. Insurance works similarly—if a business doesn’t know the accurate rebuild cost, they could be left significantly short when they need cover the most.”
The Importance of Professional Rebuild Assessments
To combat the risks of underinsurance, Thomson urges businesses to work closely with their brokers and obtain a professional rebuild cost assessment. “Good brokers play a crucial role in ensuring businesses have adequate coverage. Having an up-to-date and accurate valuation is the only way to ensure that businesses are fully protected against potential financial disaster.”
Safeguarding Business Resilience
Given today’s economic climate, resilience is more important than ever. “With rising costs and economic uncertainty, businesses need to ensure they can withstand unexpected losses,” Thomson concludes. “The last thing any business needs is to discover too late that they are dramatically underinsured.”
For further information visit www.rebuildcostassessment.com
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