3 August 2026 Many businesses assume that because they have insurance in place, they are fully protected. Unfortunately, that isn’t always the case. Underinsurance is one of the most common issues identified when commercial claims are made, and it can have a significant financial impact when a business needs its insurance most.
Whether your business has grown, invested in new equipment or experienced rising replacement costs, it’s important that your insurance reflects the current value of your assets and operations. Regularly reviewing your cover can help reduce the risk of unexpected shortfalls if you need to make a claim.
What is underinsurance?
Underinsurance occurs when the amount insured under your policy is lower than the actual value of the property, equipment or financial exposure it is intended to cover.
Commercial insurance policies usually include separate sums insured for different areas of the business, such as:
- Buildings
- Stock
- Plant and machinery
- Contents and equipment
- Business interruption
Each section should be reviewed individually. Having adequate cover for one area does not necessarily mean the rest of the policy is sufficient.
If the sums insured no longer reflect the true replacement cost or financial exposure, your business could be underinsured.
Why underinsurance can be expensive
The consequences of underinsurance are often only discovered when a claim is made.
Many commercial policies include an “average” clause. This allows insurers to reduce a claim settlement if the declared sum insured is less than the actual value at risk.
For example, if stock worth £200,000 is insured for £100,000, only 50% of the value has been insured. If a claim for £40,000 is made, the insurer may reduce the payment to £20,000, subject to the policy terms and conditions.
This reduction can apply even when the claim is well below the stated sum insured.
Understanding how average works is an important part of managing the risk of underinsurance.
Replacement cost is often higher than expected
Many commercial policies are arranged on a replacement basis, meaning the insurer assesses the cost of replacing damaged or destroyed items with new equivalents, where this is provided for under the policy.
Businesses sometimes focus on the current value of older equipment rather than the cost of purchasing a modern replacement. Inflation, supply chain pressures and increased manufacturing costs have made replacement costs significantly higher in recent years.
This can leave businesses unintentionally underinsured, particularly where machinery, specialist equipment or technology has not been reviewed for some time.
Business interruption deserves careful consideration
Business interruption insurance is designed to support a business financially while it recovers following an insured event. However, it is one of the areas most commonly underestimated.
There are two key elements that need careful consideration:
- The sum insured.
- The indemnity period.
The indemnity period is the maximum length of time the policy may provide cover following an insured loss, subject to the policy terms.
For many businesses, recovery takes considerably longer than expected. Delays in obtaining planning approval, sourcing specialist machinery, securing contractors or rebuilding premises can all extend the recovery period.
If the indemnity period expires before the business has returned to its expected trading position, any ongoing financial losses beyond that point may no longer be covered.
Find out more about how Safe and Insured can help with your commercial insurance renewal.
Keeping your policy up to date
Businesses evolve over time, and insurance should evolve with them.
It is good practice to review your cover whenever there are significant changes, including:
- Business growth or increased turnover.
- Purchasing new machinery, vehicles or equipment.
- Expanding into additional premises.
- Refurbishment or alterations to existing buildings.
- Changes in stock levels.
- Rising replacement costs due to inflation.
Even where no major changes have taken place, reviewing your policy before each renewal can help ensure your sums insured remain appropriate.
Getting valuations right
Calculating accurate sums insured can be challenging, particularly for businesses with specialist equipment, complex operations or multiple sites.
Safe and Insured can help explain how different sections of a policy operate and identify where further information may be required. In some cases, an independent professional valuation may also be appropriate to establish accurate rebuilding costs or asset values.
Providing complete and accurate information when arranging or renewing insurance is important, as insurers rely on this information when assessing the risk and handling claims.
Reducing the risk of underinsurance
Underinsurance is not always obvious until a claim occurs, which is why regular reviews are so important.
Taking time to check your sums insured, understanding how your policy responds and ensuring your cover reflects the current needs of your business can help reduce the risk of unexpected financial shortfalls.
If you are unsure whether your current cover remains suitable, speaking to your Safe and Insured broker before renewal can help you make informed decisions about your insurance arrangements.