Protecting Your Business from Underinsurance Risks

Protecting Your Business from Underinsurance Risks
August 25, 2025 6 mins

Protecting Your Business from Underinsurance Risks

Protecting Your Business from Underinsurance Risks

With the risk of underinsurance growing amid global uncertainty, businesses must act to ensure they have the right coverages in place.

Key Takeaways
  1. Businesses that are underinsured risk receiving reduced claim payments, or having claims denied altogether, which can create major financial shortfalls after an incident.
  2. Common causes of underinsurance include outdated or inaccurate valuations, failure to account for all relevant costs, and changes in business operations not reflected in coverage.
  3. Regularly updating asset valuations and business exposures – alongside business changes and insurance limits – is essential to ensure insurance coverage remains accurate and sufficient.

Why Underinsurance Could be a Problem for Your Business and How to Prevent it

It is critical for all UK businesses to understand how underinsurance could lead to a damaging recovery shortfall following a claim. This article discusses the impact of property underinsurance and what businesses can do to protect themselves.

Underinsurance is an unseen problem for many businesses and often only makes itself known when submitting an insurance claim. If underinsured, the business will quickly realise that a claim for property theft or damage, for example, may not be fully covered by their insurer resulting in a potentially damaging recovery shortfall. According to the surveyor Charterfields, assets at eight out of ten business locations are underinsured, with four out of ten insured for less than half of what it could cost to restore the business back to where it was before a claim.1

So, what is underinsurance, how does it happen, and what can businesses do about it?

What is Underinsurance?

Underinsurance is when a business’s declared sums insured is not sufficient to cover the full cost of a claim. It can apply to a business’s buildings, plant and machinery, business interruption and even exposures like liability, with potentially severe consequences for the business’s financials.

Why Does Underinsurance Matter?

Not only might policy limits prove to be inadequate, which would leave a business short of funds, but in the case of asset insurance, insurers may also penalise the policyholder by applying ‘average’. This is where an insurer can proportionately reduce a claim payment to reflect the amount of underinsurance. For example, if a business only insured 63 percent of its buildings or plant and machinery by value, then the insurer may apply average for a claim and only pay 63 percent of the value of the loss. Also, be aware that deliberate underinsurance could invalidate the entire policy.

Why Does Underinsurance of Assets Happen?

Often underinsurance is simply a result of out of date or inaccurate valuations for buildings, plant and machinery. But there are other causes of underinsurance, such as a business declaring the market value of their premises rather than the rebuild costs; omitting debris removal and professional fees incurred in clearing and reinstating property; or not disclosing to its insurer the true valuations involved to try and reduce premium costs. Another cause of underinsurance commonly arises where a business has changed its operating model and has different levels of exposure than it had before. For example, it is still calculating values based on old figures, or has not updated values to reflect increased stock-holding on its premises to counter supply chain vulnerabilities.

Global Uncertainties Could Make Underinsurance Worse

The underinsurance problem is likely to continue to escalate with the ongoing steep rise in costs of labour and materials making property repairs far more expensive than a year ago, as well as other global uncertainties around issues like trade that can push up the costs of materials as well as spare parts. This situation is illustrated with reference to the rebuilding cost index below, which shows that rebuilding costs have increased by 20 percent since 2020 and equipment costs by over 25 percent.

Protecting your business from underinsurance risks diagram
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As global volatility rises, so does the unseen risk of underinsurance for many businesses. Now more than ever, it’s important to understand your business exposures so that you’re protected in the case of an event.

Rob Kemp
CEO Commercial Risk, Aon UK

How Can Your Business Prevent Underinsurance?

  • Keep pace with valuations

    Make sure your business instructs regular reinstatement valuations (the cost to rebuild or replace rather than the market or written down asset values) every three to five years for all your buildings, machinery and plant.

  • Consider any business changes

    Adjust insured values to reflect changes in your business. (Policies may require you to do so immediately or within a defined period). At renewal take care to ensure that values declared are reassessed.

  • Review business interruption basis

    Conducting a Business Impact Analysis will allow your business to understand the potential consequences of an incident and the true loss of earnings that would result allowing the most appropriate basis of cover to be selected whether this is insurable gross profit, increased cost of working or another measure, the indemnity period (period required to get things back to normal) and vulnerabilities to your supply chain.

  • Review your average clause

    If an average clause applies to your policy, it may be possible to have it removed provided regular valuations are carried out. Otherwise you should be aware that it could apply and potentially reduce your claim if an insurer believes the values insured were not correct.

  • Review your insurance limits

    With insurance premiums stabilising or even falling in some cases, you should revisit your existing cover limits and sub-limits – the maximum amount an insurer will pay out on a covered claim or for a particular covered claim. These are often overlooked and rolled over from one year to the next. During the soft market insurance cycle it may be possible to raise these limits at little or no extra premium in current market conditions to reflect the higher potential losses.

For more guidance on this topic or underinsurance more generally and how Aon can help protect your business from underinsurance, please speak to your Aon advisor or risk consultant.

1 Source: https://charterfields.com/the-importance-of-adequate-coverage-for-property-and-contents/

General Disclaimer

The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information and use sources that we consider to be reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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