Increasing numbers of business owners are underinsured for their commercial property – but is this a deliberate decision?

On 5 December 2022, broker Gallagher issued the results of its new research - this found that two in five commercial properties in the UK are currently underinsured.

The research polled 503 board level executives working at UK businesses - who own a premises or are commercial property landlords - as well as 106 insurance claims managers that have final responsibility for managing commercial buildings claims.

Feedback from these respondents found that 43% of commercial property owners who have repaired or rebuilt their commercial premises in the last 12 months were, in fact, underinsured.

Furthermore, claims managers responsible for commercial property repairs told Gallagher that businesses which have not reviewed their insurance could be liable for more than 40% of the value of repairs or rebuilds, on average, due to underinsurance.

Almost all (96%) of the surveyed claims managers said there has been a rise in the number of properties that are underinsured in the past 12 months - they believed the root of this underinsurance problem was rapid inflation in the cost of both building materials and labour.

Valuation contradictions

Around two-thirds of business leaders who own their premises (65%) have not reviewed their commercial property insurance during the past year, indicating that many firms could find themselves out of pocket if they needed to make a claim, the broker warned.

Some businesses, however, have gone even longer without looking at their policy - 16% of these respondents have not reviewed their insurance at any point in the last five years.

Gary Fletcher, Gallagher’s managing director for the south in the UK, said: “Property underinsurance is at a record high currently because of issues such as inflation and the rising cost of materials - however business owners also often make the mistake that the valuation of [their] property is based on what it would sell for.

“As property prices haven’t changed a great deal over the last year, that valuation is the same.

“In fact, [property valuations are] based on rebuild costs, which have unfortunately risen dramatically over the last year.

“As a broker, we advise our clients on their insurance and the need to review their cover when issues like this arise - but some businesses won’t necessarily realise the extent of the issue.”

Lack of understanding?

Businesses may not realise the extent of the issue, but the impact of inflation on the cost of claims has been the talk of the insurance industry for the past year – warnings abounded even before the war in Ukraine created further pressure in the global supply chain.

The results of Gallagher’s research signposted a bigger issue for the insurance sector - and brokers in particular. The message about the urgent need for business owners to reassess their insured values is either failing to hit home or, more worryingly, failing to be delivered.

If the research had found that the majority of those who were underinsured at least understood this fact and had made the conscious decision to take the risk, there would be a hugely different conversation to be had.

At present, the industry must avoid a situation where businesses could decry the sector for failing to tell them that their products would not cover their risks.