Two in five (40%) commercial properties in the UK are currently underinsured, according to research by risk management and insurance broker Gallagher.

In research amongst business owners and commercial property claims managers, Gallagher found that the shortfall of underinsured properties was an average of 43% against the rebuild value covered by their insurance – and where there is a gap, businesses are likely to be liable to pay the difference.

Almost all (96%) of the claims managers questioned said there has been a rise in the number of properties that are underinsured in the past 12 months and the root of the underinsurance problem is the rapid inflation in the cost of building materials. Government data in October 2022 showed a 16.7% increase for ‘all work’ year-on year and more specifically the cost of cement increased by 18% between September 2021 and September 2022, with steel up by 13%2 and the price of timber up by 35% year-on-year in 2021-2022.

In addition, 61% of claims management experts said that more properties are also underinsured in part due to rising labour costs. When it comes to what’s causing construction labour cost rises, 85% cite inflation, and just over three-quarters (77%) say that Brexit is a major factor due to the decreased availability of labour.

The majority of business leaders who own their premises (65%) have not reviewed their commercial property insurance during the past year, indicating that many could now be at risk. Some have gone even longer without looking at their policy, with one in six (16%) not having 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 the property is based on what it would sell for and, as property prices haven’t changed a great deal over the last year, that the valuation is the same. In fact, the valuation is 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.”

The most common reasons amongst business owners for not reviewing their property valuation was thinking nothing had changed since last time they checked (29%), trying to keep insurance costs down while inflation is causing budget constraints elsewhere (23%) and simply being too busy with other priorities (20%) to think about it.

Despite this many who own their premises say that one or more of their properties has needed major repairs (18%) in the past 12 months. Of those whose premises were damaged and they made a claim on their insurance, 43% reported that they were underinsured.

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