Avoid the Pitfalls of Underinsurance

Learn how the average clause works and prevent costly shortfalls.

Underinsurance occurs when the sum insured on your property policy is less than the actual rebuild cost of your building.

This can happen when:

  • A building has not been valued recently
  • Owners guess the rebuild figure
  • Listed or heritage buildings are undervalued
  • Renovations or extensions weren’t added to the policy

Underinsurance is surprisingly common, and insurers say that up to 80% of UK properties are not insured for the correct amount.

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The Average Clause – How It Affects a Claim

Most commercial property insurance policies include an “Average Clause.”

This means that if you’re underinsured, any claim payout will be reduced in proportion to the amount of underinsurance — even if the claim is only partial.

Example:

Let’s say:

  • Your building is worth £1,000,000 to rebuild
  • You only insure it for £600,000
  • A fire causes damage of £200,000

Because you’ve only insured 60% of the true value, the insurer applies the average clause:

£200,000 x 60% = £120,000 payout

You would be £80,000 out of pocket, even though the loss is only partial.

Listed & Heritage Buildings – Even More Critical

  • Confusing market value with rebuild cost
  • Using outdated valuations (more than 5 years old)
  • Only adjusting for partial extensions or renovations
  • Forgetting about listed status or conservation area restrictions

How to Avoid Underinsurance

Get a Professional Rebuild Cost Assessment

  • Use a RICS-accredited surveyor for a formal reinstatement valuation
  • This is not the same as market value or purchase price
  • Recommended every 3–5 years, or sooner if:
    • You’ve carried out building works
    • Costs of labour and materials have changed significantly

Insure for Full Rebuild Value

  • Include demolition, site clearance, and professional fees (architects, planning, etc.)
  • Ask your broker to add an index-linked uplift to keep the value in line with inflation

Review Annually

  • Don’t just renew based on last year’s figures
  • Use inflation-adjusted tools or ask your broker to check if valuations are still appropriate

Common Mistakes That Lead to Underinsurance

Our specialist PI team is made up of professionals who understand your sector inside out. From sole practitioners to multi-partner firms, we help secure the right cover while offering valuable insights to:

  • Strengthen your risk management frameworks
  • Improve your firm’s insurability profile
  • Ensure a smooth, stress-free renewal process
  • Help you meet SRA compliance requirements

How Qudos Can Help

  • We work with property owners, investors, and managing agents to:
    • Review sums insured
    • Arrange professional valuations if needed
    • Negotiate with insurers on index-linking and clause flexibility
  • We also advise on heritage property risks and reinstatement planning