In today’s inflationary environment, underinsurance has become a growing concern for commercial property owners. With rebuild costs rising sharply due to global supply chain issues, labour shortages, and material inflation, the sums insured on many policies no longer reflect the true cost of reinstating a property. This widening gap between insured value and actual rebuild cost is leaving businesses dangerously exposed.
What Is Underinsurance?
Underinsurance occurs when the sum insured on a property is insufficient to cover the full cost of rebuilding it to its original state. This includes not just the structure itself, but also demolition, site clearance, professional fees, and VAT. In the event of a claim, insurers apply the “average clause”, which reduces the payout in proportion to the level of underinsurance.
For example, if your property is insured for €1 million but the actual rebuild cost is €2 million, you are 50% underinsured. If you suffer a €250,000 loss, your insurer may only pay €125,000—leaving your business to cover the rest.
Why Is This Happening?
The construction sector has seen unprecedented cost inflation in recent years. According to the Society of Chartered Surveyors Ireland (SCSI), tender prices rose by over 11% in 2022 alone, following a 13% increase the previous year. These increases have been driven by:
- Escalating energy and raw material costs
- Labour shortages and wage inflation
- Supply chain bottlenecks post-Covid
- Geopolitical instability, including the war in Ukraine
Despite these pressures, many businesses have not updated their reinstatement valuations, relying instead on outdated figures that no longer reflect market realities—creating a perfect storm for underinsurance.
The Importance of Inflation-Driven Revaluations
Insurers are increasingly urging clients to commission updated reinstatement valuations. These professional assessments ensure that the sums insured are aligned with current rebuild costs, helping to avoid the financial shock of a shortfall in the event of a claim.
At LHK Group, we’ve seen a marked increase in claims where underinsurance has significantly impacted the outcome. In some cases, businesses have faced delays in reopening or have had to absorb substantial out-of-pocket costs—costs that could have been avoided with an up-to-date valuation.
Case Study: A Costly Oversight
Consider the case of a Dublin-based logistics company that suffered a fire in one of its warehouses. The property was insured for €1.8 million, based on a valuation from five years ago. However, a post-loss assessment revealed that the actual rebuild cost was €3.2 million. As a result, the insurer applied the average clause, and the company received just over half of the claim amount. The business had to cover the remaining costs themselves, delaying operations and impacting cash flow for months.
This scenario is not uncommon—and it’s entirely preventable.
How to Know If Your Property Is Properly Insured
Determining whether your commercial property is adequately insured starts with understanding its true rebuild cost. This figure isn’t the same as market value—it includes demolition, debris removal, professional fees, and VAT, all of which can fluctuate significantly over time.
To help property owners estimate rebuild costs, the Society of Chartered Surveyors Ireland (SCSI) provides a useful calculator. While this tool is primarily designed for residential properties, it offers a helpful benchmark for understanding how inflation and construction trends can impact reinstatement values.
However, for commercial properties—especially those with unique features or complex layouts—an independent valuation by a qualified surveyor is strongly recommended. This ensures your insurance cover reflects current conditions and protects your business from the financial consequences of underinsurance.
What Should Business Owners Do?
- Review your policy annually – Don’t wait until renewal to assess your cover.
- Commission a professional reinstatement valuation – Especially if your property hasn’t been revalued in the last 2–3 years.
- Account for inflation – Ensure your policy includes index-linking or inflation protection where appropriate.
- Speak to your broker – A trusted advisor can help you navigate the complexities of commercial property insurance.
Allocating a modest increase in premium today can safeguard your business from substantial financial setbacks tomorrow.
Underinsurance is a silent risk—often only discovered when it’s too late. At LHK Group, we’re committed to helping our clients protect what matters most. Our expert team can guide you through the process of reassessing your cover and ensuring your policy reflects today’s realities.
Contact us today to arrange a policy review or to speak with one of our commercial insurance specialists. Visit https://www.lhkgroup.ie or call us on 01 205 5600.
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