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Insurance coverage serves as a safety net for both individuals and businesses. However, the safety net can only protect you if it’s properly sized to your specific needs.

This brings us to the critical issue of underinsurance — a widespread problem that often goes unknown until it’s too late.

In this blog post, we will explore the risks and repercussions of underinsurance in the UK, highlighting why it’s essential for individuals and businesses to adequately assess their insurance needs.

From business interruption risks to home insurance shortfalls, we’ll guide you through the potential pitfalls of underinsurance and offer insight into how to ensure you’re fully protected.

What is Underinsurance?

Underinsurance is where your insurance coverage is not enough to cover the full value of the items or property you have insured. This could mean that your home, business or other possessions are not fully covered by your insurance policy.

The problem with being underinsured becomes clear when you need to make a claim. In the UK, many insurance companies apply what’s known as an ‘average clause’ or ‘condition of average’. If your assets are underinsured and you make a claim, the insurer may reduce your payout in proportion to the level of underinsurance.

Being underinsured can therefore lead to significant financial strain, as you could end up having to cover the shortfall between your insurance pay-out and the actual cost of repairing or replacing your property or possessions.

To avoid this, it’s important to ensure that your insurance coverage accurately reflects the full replacement cost of your assets.

Understanding “Average” in Insurance Claims

In insurance terms, ‘average’ refers to a clause that insurance companies use when handling claims for underinsured properties or items. It’s also known as an ‘average clause’ or ‘underinsurance penalty’.

If your property or possessions are insured for less than their full replacement cost, the ‘average’ clause could be applied in the event of a claim. This means that your insurance pay-out may be reduced in proportion to the amount of underinsurance.

Here’s how it works:

Let’s say your property is worth £200,000, but you only have it insured for £100,000 – i.e., you’re 50% underinsured. If you make a claim for damage costing £50,000, the insurer might only pay out 50% of the claim because of the average clause. So instead of receiving £50,000, you’d get £25,000.

The purpose of the average clause is to encourage policyholders to insure their property or possessions for their full value, thereby reducing the risk of underinsurance. It also ensures fairness by preventing people from paying lower premiums for full coverage.

How to Calculate Underinsurance

To calculate underinsurance in the UK, you need to determine the full replacement or rebuild value of your property and its contents, then compare it with the amount for which they are currently insured.

Here is a basic step-by-step process:

1.   Estimate the Rebuild Value of Your Property: This is the cost to demolish and rebuild your home from scratch, including materials and labour. You can use a professional service or an online calculator to get an accurate figure. It’s important to note that the rebuild value is not the same as the market value of your property.

2.   Calculate the Value of Your Contents: Make an inventory of all your possessions and estimate their replacement cost. Don’t forget items in your garage, shed, or attic, and remember to include high-value items like jewellery, artwork, and electronics.

3.   Compare with Your Current Coverage: Look at the amounts for which your building and contents are currently insured.

If the insured amount is less than the estimated rebuild or replacement cost, you are underinsured. For example, if your home’s rebuild cost is £200,000 and your buildings insurance is covered for £150,000, then you’re underinsured by £50,000.

Remember to review these calculations regularly and update your policy, when necessary, especially after making significant purchases or changes to your property.

Please note that these steps provide a basic guideline, and the specific calculation may vary based on individual circumstances and insurance provider requirements. There are online calculators available for more specific valuation.

Here is a link to the BCIS calculator: https://calculator.bcis.co.uk/

How Does Underinsurance Affect UK Businesses?

Underinsurance can have a significant impact on businesses, particularly in terms of business interruption. According to the Chartered Institute of Loss Adjusters (CILA), 43% of business interruption insurance is underinsured by an average of 53%. This underinsurance can leave businesses exposed to significant financial risks.

Business interruption insurance is designed to cover loss of income and help businesses recover from unexpected events that disrupt their operations. However, when a business is underinsured, this coverage may not be sufficient to cover all the losses incurred during the interruption period.

If a business is underinsured and faces an interruption, it may struggle to recover financially. The shortfall in insurance coverage could result in the business having to absorb substantial costs itself, which could threaten its viability.

To learn more on business interruption insurance, click here to read our article on it.

UK Business Insurance Statistics

Statistics reveal the prevalence of underinsurance among UK businesses:

According to the Association of British Insurers (ABI), around 1 in 5 small businesses in the UK do not have any form of business insurance.

The British Insurance Brokers’ Association (BIBA) reports that 40% of small businesses have insufficient insurance coverage, putting them at risk of underinsurance.

What Happens if You’re Underinsured

If you find yourself underinsured, you might face several consequences:

Financial Vulnerability: Underinsurance leaves businesses financially vulnerable, as they may not receive adequate compensation in the event of a claim. This can result in severe financial strain or even bankruptcy.

Legal Consequences: Businesses may face legal consequences for failing to meet insurance obligations, including fines and penalties. This can further exacerbate financial difficulties.

Operational Disruption: Inadequate insurance coverage can lead to prolonged downtime, affecting a business’s ability to operate and meet its commitments to clients and employees.

Reputation Damage: Customers and partners may lose trust in a business that cannot fulfil its obligations due to underinsurance, potentially damaging its reputation.

What To Do if You’re Underinsured

If you find yourself underinsured, there are several steps you can take to mitigate the risks and ensure you’re adequately covered:

  1. Contact Your Insurance Broker: Reach out to your current broker or insurance company and discuss your insurance cover. They can help you understand if your current insurance policy is sufficient and advise on necessary adjustments.
  2. Review Your Coverage Regularly: Regularly review your policy, especially after making significant changes to your property like renovations or extensions. It’s advisable to contact your broker before or shortly after such changes begin.
  3. Consider Construction Cost Increases: When reviewing your coverage, consider factors like increases in construction costs which can affect the cost of rebuilding your home.
  4. Insure Based on Replacement Cost: Make sure your home is insured based on its replacement cost, not its market value. The replacement cost is the amount it would cost to demolish and rebuild your home from scratch, while the market value is what someone would pay to buy your home and land in its current condition.
  5. Seek Expert Advice: If you’re unsure about your coverage, consider consulting with an expert, such as a loss assessor, who can provide tailored advice for your situation.
  6. Don’t Skimp on Insurance: While it might be tempting to lower your premiums by reducing your coverage, this could leave you significantly out of pocket if you need to make a claim in the future.

Mitigating Underinsurance with a Loss Assessor

A loss assessor plays a crucial role in mitigating the financial impact of underinsurance:

  1. Assessment: A loss assessor evaluates the true value of a policy holder’s assets, ensuring that they are adequately insured. They can identify gaps in coverage and recommend adjustments to policies.
  2. Claim Advocacy: In the event of a claim, a loss assessor advocates on behalf of the policyholder to ensure they receive a fair and full settlement, minimizing the impact of “average” on the pay-out.
  3. Policy Review: Loss assessors regularly review insurance policies to ensure they remain aligned with the policy holder’s needs, reducing the risk of underinsurance over time.


In conclusion, underinsurance in the UK poses significant financial and operational risks to both individuals and businesses. Understanding the concept of “average” in insurance claims is crucial, as it can result in reduced pay outs.

Engaging a loss assessor can help policyholders assess their true insurance needs, navigate claims processes, and mitigate the financial impact of underinsurance, ultimately safeguarding their financial well-being.

If you would like to speak to an expert about this or any other aspect of your claim, call our free Property Claim Helpline on 0800 002 5819, for a no obligation consultation.


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