Underinsurance in UK commercial property is becoming a significant issue. As construction costs rise and regulations evolve, many commercial properties are insured below their true reinstatement value, creating substantial financial risk for owners. This is particularly relevant in a landscape shaped by sustainability requirements, stricter fire safety standards, and the ongoing impact of the Building Safety Act.
What is commercial property underinsurance?
In a commercial context, underinsurance occurs when the declared sum insured does not reflect the full cost of rebuilding a property to modern standards. This includes demolition, professional fees, and compliance with current regulations, not just market value.
Most commercial property insurance policies apply an “average clause”, meaning any claim may be reduced in proportion to the level of underinsurance.
Why underinsurance in UK commercial property is increasing
Several structural factors are driving higher reinstatement costs:
- MEES and energy efficiency requirements
Landlords must meet minimum EPC standards, often requiring upgrades such as improved insulation, glazing, and low-carbon systems. Any rebuild must comply with current standards, increasing costs. - Enhanced fire safety standards
New requirements for detection systems, materials, and compartmentation have significantly raised rebuild costs. - The Building Safety Act and wider regulation
Increased compliance, documentation, and risk management expectations are adding further cost and complexity, while insurers respond with higher premiums and tighter terms.
The risks of underinsuring commercial property
Although rising premiums may encourage some owners to limit cover or delay revaluations, this approach increases exposure to underinsurance. The savings on premiums are often minor compared to the potential financial impact of a reduced claim.
Insurance should therefore be treated as an active part of asset management, with regular reviews to ensure adequacy.
Who is responsible for commercial property insurance?
For commercial landlords, insurance is typically arranged by the landlord and the cost recovered from tenants through insurance rent or service charge. While this allows costs to be passed on, landlords retain responsibility for ensuring adequate cover.
Premiums may also be challenged by tenants or become harder to recover during void periods.
Freeholders face even greater exposure. Although they can often recover premiums, they remain responsible for setting accurate reinstatement values and bear the full cost of any shortfall if a property is underinsured. This can result in unexpected capital expenditure, disputes with occupiers, and operational risk.
Conclusion
Underinsurance in UK commercial property is no longer a peripheral issue. Driven by rising costs, regulatory change, and increased insurer scrutiny, it presents a material financial risk. Regular reinstatement valuations and proactive insurance management are essential to ensure commercial property assets remain adequately protected.
Our team are here to help
If you are concerned about commercial property underinsurance, our expert commercial property solicitors can help you assess your risk and ensure your assets are properly protected. From reviewing lease provisions and insurance obligations to advising on reinstatement valuations, we provide clear, practical guidance tailored to your portfolio.
Get in touch with our team today, call us on 0800 118 1500 or complete our form below.
The contents of this blog or any other published by Talbots Law cannot be considered as legal advice. You should take no action without prior consultation with a qualified solicitor or legal professional. The contents of this blog refers to the process in England and Wales.
This blog was written by Rachel Raybould-Dear, Solicitor in our Commercial Property team.