Most business owners, understandably, want to keep insurance costs as low as possible. However, underinsurance can lead to serious, even devastating, consequences.

Underinsurance occurs when a policyholder’s level of cover does not fully meet their needs. That shortfall might relate to the sum insured, the length of an indemnity period, or both. 

Crucially, the size of the claim does not matter. If an insurer establishes that cover was insufficient, the business could be required to fund a proportion of the costs itself, at precisely the moment when cashflow is already under pressure. In the worst cases, underinsurance can put the entire business at risk.

A widespread but underestimated issue

Underinsurance affects all types and sizes of businesses, but it often hits property-related industries and small businesses with limited savings the hardest.

Even though more people are aware of the problem, underinsurance is still common. According to RebuildCost
Assessment, 76% of UK buildings are underinsured, with most insured for only 63% of what it would actually cost to rebuild. For a £500,000 rebuild, that’s a £185,000 gap.

In a 2025 survey by Allianz, only 52% of business owners knew their property’s rebuild value, and just 59% of those used a professional valuation.

Why businesses fall into the underinsurance trap

There are a few main reasons underinsurance remains a problem. One major reason is using the wrong numbers to set coverage. Many property owners use the purchase price or mortgage value, but these show market value, not what it would cost to rebuild. Rebuild costs include demolition, professional fees, materials, and labour, which can be very different from the original price.

Setting indemnity periods that are too short is another issue. After a major event such as a fire or flood, rebuilding can take a long time. Delays from planning or special materials can make it even longer. If the indemnity period ends too soon, the business may not receive sufficient income support.

Rising claim costs add more pressure. Construction costs are unlikely to fall! Issues such as global tensions, trade rules, and new regulations can slow repairs and increase costs. These delays not only make rebuilding more expensive but also lead to longer business interruptions.

Buying insurance just because it’s cheap can backfire. Direct-to-market policies might appear less expensive, but without expert advice, business owners may miss important changes in rebuild costs or the time required to get back up and running.

The financial and legal consequences

Underinsurance doesn’t just lower the payout on big claims. Many insurers use the average clause, under which the settlement is reduced based on the extent of underinsurance.

For example, if a building is insured for £600,000 but actually needs £1 million to rebuild, a £50,000 claim might only pay out £30,000. The business would have to cover the remaining £20,000.

Having the wrong indemnity period can be just as harmful, leaving businesses without income support after the coverage ends.

There are also legal risks. The Insurance Act 2015 says policyholders must fairly present their risks. If an insurer believes the sums insured were deliberately set too low, it can cancel the policy, requiring the business to pay any losses itself.

How businesses can protect themselves

Underinsurance can be avoided. Businesses can take practical steps to protect themselves.

Getting a professional valuation is a key first step. A reinstatement cost assessment by a qualified surveyor provides an accurate benchmark and helps track rebuilding cost trends.

Regular reviews are just as important. Checking sums insured and indemnity periods each year helps make sure coverage keeps up with inflation, labour changes, and supply chain issues. Many commercial policies offer a Day One Uplift for inflation, but this should add to, not replace, regular reviews.

Getting expert advice is still one of the best ways to stay protected. An experienced insurance broker understands your business and its unique risks, ensuring your coverage aligns with your real needs.

A shared responsibility

Underinsurance is a hidden risk that can wipe out years of hard work in one incident. While it’s natural to want to save on premiums, not having enough coverage can end up costing much more.

Arrange a call with base to make sure your insurance won’t leave you short.