What is underinsurance and why does it matter?

February 11, 2026

When arranging insurance we often hear ‘nothing has changed since last year’, but in reality this is rarely the case.

Underinsurance is one of the biggest hidden risks facing both businesses and homeowners today. It happens when the amount you are insured for doesn’t match what it would actually cost to repair, replace, or rebuild something in the present day. Rising inflation and increasing rebuild costs can cause this gap to widen gradually and often unnoticed.

As our Managing Director, Ben Butler, often reminds new clients:

“When we review insurance for new clients, we find that many are underinsured, some by as much as 50 percent.”

For many UK businesses and high net worth households, underinsurance is far more common than they realise, and what starts as a small discrepancy can quickly turn into a significant financial shortfall at the worst possible moment, when you need to make a claim.

Underinsurance in business: A growing threat

Rising costs, inflation and supply chain delays have made the risk even more apparent. Did you know?

33% of SMEs with buildings insurance are underinsured*
55% of UK businesses reducing their cover are doing so to cut costs**
Only 39% of UK businesses have reviewed their insurance in the last year**

Most businesses think they’re prepared for the worst. But without adequate cover, replacing buildings or stock, or even having to pause operations entirely, could have extremely serious consequences. In fact, According to the 2025 Protection Gap Report published by Hiscox, around 74 % of small businesses surveyed have some level of underinsurance, meaning their insurance cover may not be enough to protect them against major claims or risks***.

We regularly uncover significant underinsurance when reviewing new clients’ policies, often in areas they assumed were correctly covered.

And many SMEs only discover the problem when it is too late, often during a major loss that disrupts operations or threatens closure.

Common causes of SME underinsurance

• Outdated property valuations
• Business growth without updating cover
• Misunderstanding policy wording

Which areas are most at risk of underinsurance?

Underinsurance can affect almost any type of policy, from commercial property to business interruption, and it is becoming a more pressing issue across all industries. Many of the factors that lead to underinsurance are outside of a business owner’s control, but regular, accurate valuations can help ensure your cover reflects the true value of your property and assets.

Although any insurance policy can be affected, there are a few areas where we commonly see significant underinsurance:

Commercial property
Mortgage lenders often assess a property’s reinstatement value, but this assessment is designed to protect the lender, not the business owner. As a result, the rebuild cost applied may not reflect the true cost of reinstating the property, particularly internal fixtures, finishes, or operational fit-out.
Business interruption
Calculating potential loss of profits is complex. If a loss occurs late in a policy period during a period of growth, you may find your cover no longer reflects your current trading position. Many businesses also underestimate how long it will take to fully recover, leaving them exposed if interruption lasts longer than twelve months.
Equipment and contents
Business assets are often undervalued because accountants may record values based on depreciation. Insurance, however, is based on reinstatement as new. This means the cost of replacing equipment today may be far higher than the figures shown in your accounts.

The consequences for businesses

Underinsurance can lead to:

Partial or denied claims when sums insured are too low
Extended downtime if business interruption cover is insufficient
Regulatory and legal exposure
Reputational damage from service delays or operational disruption

At a time when businesses are already navigating inflation and rising operational costs, an unexpected shortfall can be devastating.

Underinsurance at home: A major risk for high net worth individuals

Underinsurance doesn’t only affect businesses. High net worth households face similar, and in some cases even greater risks when the value of their homes, possessions and collections exceed the limits of standard policies.

When thinking about underinsurance, your home is one of the first areas to review, and with property prices rising year after year, it’s surprisingly easy for your cover to fall behind the true rebuild value of your home. The result can be a shortfall of cover if you ever need to make a claim.

For high value homes, generally those with a rebuild value over £1 million, a standard home insurance policy is rarely enough. Rebuild and repair costs can be substantial, particularly for listed properties or homes that feature specialist materials or intricate decorative details. These can cost far more to replace today than when the property was first insured. Regular valuations and a specialist high value home and contents policy are essential to ensure your cover keeps pace with reality.

Industry data shows:

Around 70% of UK buildings are underinsured and often only insured for around 67% of the true rebuild cost****
Nearly 80% of Grade II listed buildings are underinsured, averaging only 64% of the rebuild cost****

Even a minor incident can result in a significant financial shortfall when sums insured are not accurately maintained, and the risk doesn’t stop with the property itself.

High value, high exposure

Luxury items appreciate quickly, and collections often grow faster than policies are updated. Standard home insurance usually is not enough, and many standard policies have strict limits for valuables and may not cover items outside of the home, accidental loss or damage.

Another commonly overlooked area is clothing and accessories. Wardrobes are one of the most commonly underinsured areas for high net worth individuals. Designer clothing, shoes, handbags and accessories can hold significant value, yet they are rarely included properly when estimating home contents. These items can accumulate quickly and may cost far more to replace today than when they were purchased. Regular reviews and accurate valuations help ensure your wardrobe is fully protected.

Specialist high value home and contents insurance, or dedicated policies for fine art, jewellery and watches, ensure items are covered for their true value.

How to fix underinsurance before it becomes a problem

Here are three steps every business and high net worth individual should take:

1. Get regular valuations

There are all sorts of factors that could leave you with the wrong level of cover, but an up-to-date valuation can help make sure your level of cover reflects the true value of your business or property.

2. Review your policies annually

Don’t wait for a claim to discover gaps. Any claim will only be paid based on the amount of cover chosen (called the average clause).

However big or small – your claim will be impacted by the percentage difference between your recommended total sum and the actual sum for which you’re insured.

3. Work with specialists

High net worth and commercial insurance require tailored solutions. A specialist broker can ensure you have the right cover in place.

“Stay in touch with your broker, check your limits and know the ramifications of underinsurance.” Danial Wright, Client Director – Freight and Marine

Protect your future with confidence

Underinsurance is a risk you don’t want to uncover the hard way. Whether you’re safeguarding your business or protecting a home filled with valuable assets, the right advice makes all the difference.

Our team specialises in helping clients understand and eliminate underinsurance, ensuring your assets, business and lifestyle are properly protected.

Need expert advice on underinsurance? Speak to the team and email Matt.Barton@macbeths.co.uk or give us a call on 0118 916 5480

*Based on Aviva’s modelled data on SME customers with buildings insurance, June 2025

** YouGov Survey commissioned by Aviva – 1,218 UK senior business leaders surveyed between 15 September to 8 October 2023

*** Hiscox Protection Gap Report 2025

****RebuildCostASSESSMENT.com data