Underinsurance: Why “last year’s figures” no longer add up

Why underinsurance is rising

For many businesses, insurance values are set annually and then left unchanged. But in today’s environment, that approach is increasingly risky.

A combination of inflation, labour shortages and global supply chain disruption has driven up the cost of rebuilding and replacing assets far more quickly than many businesses expect. In some cases, the cost of materials and equipment has increased significantly,¹ well beyond headline inflation, meaning historic values can quickly fall out of date.

At the same time, insurers are applying greater scrutiny at claim stage. Declared values are being assessed more closely against current costs and where these are found to be inaccurate, settlements may be reduced or restricted.

The result? More businesses are unknowingly carrying underinsurance exposure.

What do we mean by the “true cost”?

• Demolition and debris removal
• Professional fees (e.g., surveyors, engineers)
• Compliance with current building regulations
• Associated costs such as VAT and statutory requirements

If these elements aren’t factored in, businesses can easily underestimate the real cost of recovery.

It’s more than bricks and mortar

Underinsurance is often associated with buildings, but the risk is much broader:

Contents and machinery

Replacement costs for plant, equipment and stock have risen significantly. Supply challenges and labour shortages mean items may cost more and take longer to source or install, than originally anticipated.

Supply chain and recovery delays

Disruption to suppliers, materials or logistics can delay repairs, replacement and reinstatement, particularly where specialist equipment or imported materials are involved.

Business Interruption (BI)

Delays in sourcing materials or equipment don’t just increase costs, they can significantly extend the time it takes to fully recover.

Business interruption limits and indemnity periods set in previous years may therefore no longer reflect realistic recovery times, leaving potential gaps in cover.

Inflation on claims costs

Claims costs can also rise because of material prices, labour availability, legal costs and more complex supply chains. These pressures may move faster than annual index linking or historic estimates, increasing the risk that declared values fall behind.

Why this matters at claim time

Underinsurance is often invisible, until it’s tested. If the declared value is lower than the true value at risk, insurers may apply “average”, reducing claim payments proportionally. In practice, this can mean:

• A reduced claim settlement
• Unexpected out-of-pocket costs
• Greater cashflow pressure during recovery

In some cases, cover may also be limited to the declared value or revert to an indemnity basis rather than full reinstatement.

At a time when a business is already dealing with disruption, this can place additional strain on cashflow, staff and customer relationships.

What can businesses do now?

Underinsurance is often unintentional, but businesses can take practical steps to reduce the risk:

• Review sums insured regularly to reflect current rebuild and replacement costs
• Consider a professional reinstatement cost assessment
• Revisit business interruption indemnity periods to account for delays
• Check that contents, machinery and stock values reflect current replacement costs
• Sense-check whether index linking alone is sufficient in today’s environment

Regular reviews are important because rebuilding, replacement and recovery costs can change quickly.

Underinsurance is rarely the result of poor decision-making; more often, it reflects how quickly costs and operating conditions can move on.

Relying on last year’s figures can therefore create unintended risk, particularly where values have not been reviewed against current reinstatement and replacement costs.

Speak to your broker

Checking whether your insurance values remain appropriate is not always straightforward and in some cases may require input from a qualified valuation or reinstatement cost specialist.

Your broker can help you review your existing insurance arrangements, explain how underinsurance could affect a claim and discuss whether a professional assessment may be appropriate.

Insurance cover, limits and exclusions will vary by policy, so any review should take into account of your individual arrangements and circumstances.

Talk to us

Call us on 01274 515747, email mail@lwood.co.uk, or drop by. We’re here Monday to Friday, 8:30am to 5pm.