Why Underinsurance Is a Hidden Risk for Commercial Property Owners
The insured value is not the same as the market value
One of the most common misunderstandings in commercial property insurance is the assumption that a building should simply be insured for the amount it would sell for.
In reality, the figure used for buildings insurance is usually based on the estimated cost of rebuilding the property, not its open market value.
These two figures can be very different.
A commercial property may be worth £750,000 on the market but require considerably more or less than that to reconstruct depending on its size, construction, location, demolition requirements and professional fees.
At Citrus Commercial Circle, we believe landlords and investors across Bury, North Manchester and the wider North West should understand this distinction because underinsurance can create significant financial exposure if serious damage occurs.
What is underinsurance?
Underinsurance occurs when the sum insured is lower than the amount actually required to rebuild or replace the insured asset.
For commercial buildings, this can happen when:
- Rebuild costs have increased
- The property has been extended
- Improvements have not been reflected in the policy
- The declared value has not been reviewed for several years
- Professional fees have been underestimated
- Demolition and site clearance costs have been overlooked
The result can be a gap between the insurance cover available and the real cost of reinstatement.
Construction costs change over time
Building costs do not remain static.
Prices can be influenced by:
- Labour costs
- Materials
- Energy prices
- Contractor availability
- Building regulations
- Specialist construction requirements
A rebuild figure prepared several years ago may therefore no longer provide an accurate basis for insurance.
Regular reviews are important.
The consequences can extend beyond a total loss
Some property owners assume underinsurance only matters if a building is completely destroyed.
That is not necessarily the case.
Depending on the policy wording, underinsurance may affect partial claims as well.
This means damage to only part of a building could still expose the owner to a financial shortfall.
Commercial property owners should therefore understand exactly how their policy responds.
The average clause can matter
Some insurance policies contain an average clause.
Where applicable, this can reduce a claim proportionally if the building is underinsured.
For example, if a property is insured for substantially less than its proper reinstatement value, the insurer may apply that same proportion when settling a covered claim, subject to the specific policy terms.
This is why accurate declared values are so important.
Property owners should always review the wording with their insurer or broker rather than relying on general assumptions.
Reinstatement cost assessments provide greater confidence
A professional reinstatement cost assessment can help establish an appropriate sum insured.
This type of assessment considers factors such as:
- Building size
- Construction type
- Demolition costs
- Debris removal
- Professional fees
- Rebuilding requirements
A chartered surveyor with relevant experience can help provide a more reliable figure than simply estimating based on purchase price.
The Royal Institution of Chartered Surveyors (RICS) provides professional standards relevant to property surveying and valuation.
Older buildings can require specialist consideration
Older commercial buildings may be particularly difficult to insure accurately.
Examples include:
- Mills
- Historic warehouses
- Traditional brick buildings
- Listed structures
- Unusual industrial premises
Reconstruction may require specialist materials or building methods that increase costs.
A simple cost-per-square-foot assumption may not be sufficient.
Listed buildings can create additional challenges
Listed commercial properties may need to be rebuilt or repaired using specific materials and techniques.
This can increase:
- Labour costs
- Professional fees
- Reinstatement times
- Specialist material costs
Owners of listed buildings should ensure their insurance arrangements reflect these additional considerations.
Extensions should trigger a policy review
Commercial properties often change after purchase.
Owners may add:
- Mezzanine floors
- Extensions
- New offices
- Additional storage areas
- Improved welfare facilities
These works can materially increase rebuilding costs.
Insurance arrangements should therefore be reviewed after significant alterations.
Tenant improvements can complicate responsibility
In leased commercial property, tenants may install their own fixtures, equipment or improvements.
The lease should clearly establish responsibility for insuring different elements of the property.
Potential questions include:
- Who insures the building?
- Who insures tenant fixtures?
- Who covers machinery?
- Who covers stock?
- Who arranges business interruption insurance?
Clear allocation helps reduce disputes after a loss.
Buildings insurance and contents insurance are different
Buildings insurance generally protects the physical structure of the commercial property.
Contents insurance may cover items such as:
- Furniture
- Equipment
- Stock
- Computers
- Machinery
Businesses should not assume these items are automatically included within the landlord’s buildings policy.
Occupiers should arrange appropriate cover for their own business assets.
Business interruption can be just as important
Physical damage can prevent a business from trading even after the immediate loss has been assessed.
Business interruption insurance may help cover certain losses arising while operations are disrupted, subject to the terms of the policy.
This can be particularly important for:
- Manufacturers
- Warehouses
- Retailers
- Hospitality businesses
- Professional offices
Businesses should discuss appropriate cover with a qualified insurance professional.
Loss of rent can affect landlords
Landlords should also consider what happens if a property becomes unusable following insured damage.
If the lease suspends rent while the property cannot be occupied, the landlord may temporarily lose income.
Appropriate loss-of-rent insurance may help protect against this risk, depending on the policy.
The period of cover should reflect a realistic rebuilding timeframe rather than an optimistic estimate.
Major commercial buildings can take time to rebuild
Reinstatement after a serious loss can involve:
- Investigation
- Demolition
- Planning
- Design
- Tendering
- Construction
- Reoccupation
This process may take considerably longer than expected.
Insurance indemnity periods should therefore be considered carefully.
Security measures can influence insurance risk
Insurers may consider physical security when assessing commercial property.
Features can include:
- CCTV
- Alarm systems
- Security gates
- Access controls
- Fire detection
- Sprinklers
Good risk management may help reduce the likelihood or severity of incidents.
However, property owners should never install systems solely on assumptions about insurance savings without first discussing requirements with the insurer.
Fire safety is critical
Fire remains one of the most significant risks affecting commercial property.
Owners and occupiers should maintain appropriate:
- Fire detection systems
- Escape routes
- Fire doors
- Emergency lighting
- Risk assessments
Government guidance on workplace fire safety is available through GOV.UK.
Fire safety responsibilities should be taken seriously regardless of insurance arrangements.
Flood exposure can influence cover
Commercial properties located within areas exposed to flooding may face additional insurance considerations.
Owners should understand risk from:
- Rivers
- Surface water
- Groundwater
Flood information for England is available from the Environment Agency.
Flood resilience works may also form part of wider property risk management.
Unoccupied buildings can carry additional conditions
Commercial properties sometimes become vacant between tenants.
Insurance arrangements for an unoccupied building may differ significantly from those applying while it is fully occupied.
Policies may impose requirements such as:
- Regular inspections
- Utility management
- Security arrangements
- Notification to the insurer
Owners should notify their insurer or broker when occupancy changes.
Failing to do so could create problems if a claim later arises.
Multi-let estates create additional complexity
Insurance arrangements can become more complicated on multi-let commercial estates.
Issues may include:
- Shared structures
- Communal areas
- Service charge recovery
- Multiple occupiers
- Different business activities
The lease documentation should clearly establish how insurance costs are apportioned and recovered.
Insurance contributions should be clearly explained
Where landlords recharge insurance costs to tenants, transparency is important.
Occupiers should understand:
- What they are contributing towards
- How the premium is allocated
- When the charge is reviewed
Clear communication helps prevent misunderstandings and supports stronger landlord-tenant relationships.
Lenders usually require suitable insurance
Where commercial property is financed, lenders normally require appropriate buildings insurance to protect their security.
The policy may need to meet specific lending requirements.
Investors should review these requirements before completion rather than assuming an existing policy will automatically be acceptable.
Insurance should be reviewed after acquisition
Buying a commercial property should trigger a full insurance review.
Owners should consider:
- Reinstatement value
- Occupancy
- Property use
- Lease responsibilities
- Security
- Flood exposure
- Planned alterations
The policy should reflect the actual property rather than simply continuing historic arrangements without review.
Specialist brokers can be valuable
Commercial property insurance can involve risks that differ significantly from standard residential insurance.
Specialist insurance brokers may help owners assess:
- Appropriate coverage
- Insurer requirements
- Exclusions
- Reinstatement values
- Portfolio policies
The British Insurance Brokers’ Association (BIBA) provides information and a broker search service for businesses seeking insurance advice.
Underinsurance can affect investment returns
Insurance is sometimes viewed simply as an unavoidable annual operating cost.
In reality, correct insurance protects the capital value of the investment.
A serious uninsured or underinsured loss could affect:
- Rental income
- Loan obligations
- Capital value
- Business continuity
- Future saleability
Risk protection should therefore form part of investment strategy.
Bury and North Manchester contain a wide range of building types
Commercial property across Bury and North Manchester includes:
- Modern industrial units
- Traditional warehouses
- Former mills
- Offices
- Retail property
- Multi-let estates
These buildings can have very different reinstatement requirements.
At Citrus Commercial Circle, we believe insurance considerations should reflect the individual characteristics of the property rather than adopting a one-size-fits-all approach.
Citrus Commercial Circle’s market insight
At Citrus Commercial Circle, we encourage landlords and investors to look beyond purchase price and rental income when assessing commercial property risk.
One of the most important questions is:
If something serious happened to this building tomorrow, would the insurance genuinely be sufficient to put the property back into operation?
Regular reinstatement assessments, clear lease responsibilities and appropriate professional advice can help owners answer that question with confidence.
Final thoughts
Underinsurance is a hidden commercial property risk because it often remains unnoticed until a claim occurs.
Rising construction costs, building alterations and outdated valuations can all cause the insured value to fall behind the true reinstatement requirement.
By regularly reviewing cover, obtaining professional reinstatement assessments where appropriate and understanding the exact policy terms, commercial property owners can protect both their assets and their long-term income.
At Citrus Commercial Circle, we are proud to help landlords, investors and occupiers across Bury and North Manchester make informed commercial property decisions that protect value as well as create it.
Based in Bury. Active across North Manchester. Always on your side.
Call us today: 0161 383 1806
Email: info@citruscommercialcircle.co.uk
Visit: citruscommercialcircle.co.uk
Let’s unlock the full potential together.
Citrus Commercial Circle – Where standards meet success.
