Understanding the Risk of Underinsurance

Why Just Having Insurance Isn’t Always Enough: Understanding the Risk of Underinsurance

At Unity Insurance, we speak to clients every day who believe they’re protected. After all, they’ve purchased insurance. But what happens if a claim is made and the cover in place doesn’t reflect the true rebuild or replacement cost?

This is where underinsurance becomes a serious issue. It's not just a gap in paperwork. It’s a financial risk that can determine if a claim is paid in full, or only in part.

What is Underinsurance?

Underinsurance occurs when the amount you’re insured for (your sum insured) is less than what it would actually cost to rebuild or replace the insured asset. This is especially common with buildings cover, where rebuild costs can rise significantly over time due to inflation, materials, labour shortages, or changes in regulations.

If you make a claim and your sum insured is too low, insurers may apply what's known as the average clause. This means the amount paid out in settlement of a claim could be reduced in line with the level of underinsurance.

Here’s how the average clause works:

Claim Amount = (Sum Insured ÷ Replacement Cost) × Loss Amount

For example, if your building should be insured for £500,000, but your policy only covers £250,000, you’re 50% underinsured. If you make a £100,000 claim, the insurer may only pay £50,000.

Real Examples, Real Impact

We’ve seen first-hand how powerful it can be to have honest conversations about underinsurance:

• A youth group charity was due for renewal. After completing our fact-based evaluation, they realised their building was significantly undervalued. Their sum insured increased from £138,807 to £322,000. A vital adjustment that could make all the difference in a claim scenario.
• Another organisation renewed their policy as usual, but later revisited our advice and conducted their own rebuild assessment. They came back to update their cover and ended up doubling their building insurance, ensuring they're no longer exposed to financial shortfall.
• A site with multiple buildings was reviewed by one of our Unity Account Handlers. By separating each structure and reassessing the rebuild values, the client was able to bring their cover in line with the actual risk. The result was far more accurate protection, and the reassurance that they can rebuild fully if needed.

Unity’s Role as a Broker

Insurance shouldn’t be about ticking a box. Our responsibility is to make sure that our clients have not just some cover, but the right cover. That’s why we aim to proactively raise the topic of underinsurance during renewals and raise awareness of this topic through articles like this and our social media channels. Our experienced Account Handlers can provide you with tools to review building valuations and put you in touch with reputable rebuild cost assessment partners to ensure accurate figures.

What You Can Do

If you’re unsure whether your current sums insured reflect today’s rebuild costs, speak to your Unity Account Handler. We’re here to help, and there are simple steps you can take to reassess your cover:

• Review your policy annually. Consider if you've made changes to the building or purchased anything new
• Consider a professional rebuild cost assessment
• Ask your Account Handler if you qualify for the Free Building Estimation service
• Don’t delay. Underinsurance only becomes a problem when it’s too late

Final Thought

Insurance is designed to protect you when things go wrong. But if your policy doesn’t reflect the true value of what’s being insured, you may be left facing unexpected costs. That can make an already stressful situation even more difficult.

Underinsurance is more common than many realise. But with the right support and a proactive approach, it’s entirely avoidable.

At Unity Insurance, we’re here to help you get it right.

Call us now and let us help you:

📞 0333 091 7019
📧 [email protected]
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