Around 80% of the 4.3 million small or medium-sized enterprises (SMEs) in the UK are underinsured*. Government research also suggests that 20% of businesses suffer a major disruption every year with 80% of those affected closing within 18 months.

Inflation is now at 10% with rising interest rates and the pound’s value has declined significantly in the last 12 months. The price of goods and services are rising and this has ramifications which could have a significant impact on your insurance cover.


Rising inflation and costs could result in you being underinsured. This simply means that the level of insurance cover held will be insufficient to cover the cost or replacing or repairing insured items or the cost of rebuilding a damaged property.

There has been a 24.5% increase in the Construction Material Price Index (March 2021- March 2022) and there is no evidence to suggest that material prices are going to decline at any time in the immediate future. This could mean that the cost of re-instating a property may now exceed the declared value in the insurance policy. Equally the value of an insured asset may have risen above the declared value in the policy and lead to a risk of underinsurance.

The risks of underinsurance

Underinsurance will generally only come to light at the time a claim is made and the implications can have a devasting impact on a business. If a business is underinsured, the insurer can apply the average clause. This means that the insured policyholder will not receive the full insured replacement value and will have to suffer a proportion of any loss.

If the level of insurance cover is not adequate it will mean that you will be insufficiently covered. There is also a duty of fair representation under the Insurance Act 2015. If an insurer considers that there has been significant underinsurance there is a risk that they might declare the policy void and there would be no payment to cover the loss. It is therefore essential that all valuations are accurate and the risk is properly insured.

Example of the application of average

An owner has insured their property with a value of £1.5 million. The property is damaged by fire and the repair cost is £500,000. The insurers conclude that the true value of the property was £2m and the property has been underinsured by 25%. The value of the claim is accordingly reduced from £500,000 to £375,000.

Who and what are impacted by underinsurance

The risk of underinsurance impacts both business and personal risks and the current inflationary pressures presents a risk to all. It is not just the replacement value of assets or their repair cost which need to be considered. Consideration also needs to be given to the level of indemnity and length of cover in the event of a claim for business interruption following damage or loss to property or equipment. The potential shortage of goods and materials and labour availability should also be factored into consideration.

Mitigating the risk of underinsurance

We would recommend that a full insurance review is undertaken to ensure that current insurance arrangements provide full protection in the event of a claim. This will include a review of the current declared asset values, especially property valuations. The duration of business interruption should also be considered together with other areas of risk including such options as cyber insurance.

In a difficult insurance market, a well-prepared submission with supporting documentation is more likely to ensure that the appropriate cover is achieved.
Grosvenor Insurance can assist in providing a full insurance review and ensure that you and your business have the necessary protection in place.