Underinsurance: What It Is and Why It Puts Your Property at Risk
Underinsurance is one of the biggest hidden risks facing property owners today. If your building is insured for less than its true rebuild cost, your policy may not respond in the way you expect — even for small claims.
At Power & Land, we help clients avoid this risk by providing accurate, professional Reinstatement Cost Assessments (RCAs) that ensure your property is properly protected.
What Is Underinsurance?
Underinsurance happens when the sum insured on your policy is lower than the actual cost to rebuild your property following a total loss.
This rebuild cost includes far more than bricks and mortar, such as:
• Demolition and debris removal
• Professional fees (architects, engineers, surveyors)
• Compliance with modern building regulations
• Site access and complexity
• Inflation and material cost increases
• VAT (where applicable)
If any of these are missing or underestimated, the property is at risk of being underinsured.
What Happens If a Building Is Underinsured?
When a claim occurs, insurers have several remedies available. These can significantly reduce the amount paid out — even for partial losses.
1. The Average Clause (Proportional Settlement)
Most property policies contain an Average Clause.
This means that if your building is underinsured, every claim is reduced in proportion to the level of underinsurance.
Example of Average remedy
This example is based on your commercial property being under insured by 29.42%
Existing Declared Value: £600,000
Value at Risk: £850,000
Repair costs: £350,000
Calculation looks like this - £600,000/£850,000 x £350,000 = £247,058.82.
In the above example the building owner would need to fund £102,941.18 to reinstate the building.
This applies to all claims — fire, flood, escape of water, storm damage, and more.
2. You Pay the Shortfall
After the insurer applies the Average Clause, the remaining cost falls entirely on the policyholder.
This can run into tens or hundreds of thousands of pounds.
3. Insurance Act 2015 Remedies
If the underinsurance results from a failure to fairly present the risk, insurers may apply statutory remedies:
If the breach was careless
The insurer may:
• Reduce the claim proportionally
• Charge additional premium
• Apply different terms
If the breach was deliberate or reckless
The insurer may:
• Void the policy
• Refuse all claims
• Retain the premium
This is the most severe outcome and can affect future insurability.
4 What the proportionate remedy actually is
Under the Insurance Act 2015, if a policyholder makes a careless misrepresentation at the point of arranging cover (for example, giving an incorrect rebuild cost), the insurer can apply a remedy that reflects what they would have done had they known the true facts.
For buildings insurance, this usually means:
If the insurer would still have offered cover but at a higher premium, they can reduce the claim proportionately.
If the insurer would have imposed different terms, they can apply those terms to the claim.
If the insurer would not have insured the risk at all, they can refuse the claim entirely.
The proportionate reduction formula is:
Premium paid/Premiums that should have been paid x claim amount = settlement.
£12,000/£20,000 x £100,000 = £60,000.
This means the insured will need to fund £40,000 of the repairs.
5. Reinstatement Basis May Be Withdrawn
If the building is significantly underinsured, insurers may refuse to offer reinstatement terms and instead settle on:
• Indemnity basis (market value)
• Repair only
• Cash settlement
This may not be enough to rebuild the property to its previous standard.
Why Underinsurance Is So Common
Many property owners underestimate rebuild costs because:
• They rely on market value instead of reinstatement value
• They use outdated figures
• They don’t include professional fees or demolition
• They’re unaware of recent construction cost inflation
• They guess the figure rather than obtaining a professional assessment
• They do not know the financial implications of getting it wrong
Recent industry studies show that over 70% of UK buildings are underinsured.
How Power & Land Can Help
A professional Reinstatement Cost Assessment (RCA) is the most reliable way to ensure your property is correctly insured.
Our RCAs provide:
• Accurate, evidence‑based rebuild costs
• Full breakdowns of materials, labour, fees, and demolition
• Compliance with insurer and RICS standards
• Peace of mind that your property is properly protected
We help homeowners, landlords, housing associations, and commercial clients avoid the financial shock of underinsurance.
Protect Your Property Today
If you’re unsure whether your building is correctly insured, we can help.
A professional RCA from Power & Land ensures your sum insured is accurate — and your policy responds when you need it most.
