The majority of UK small or medium-sized enterprises (SMEs) are at risk of underinsurance following unprecedented volatility caused by the pandemic, Brexit and the war in Ukraine.

Of the 4.3 million SMEs currently in operation in the UK, around 80% are underinsured, according to data from Sedgwick.1

Seismic disruption to supply and demand has led to a scarcity of building materials, labour shortages and an exponential rise in costs. At the same time, supply chain issues show no signs of abating, transport costs continue to rise and firms face significant delays when reinstating damaged property following a loss.

At the end of last year, construction materials cost increases reached a 40-year high, based on the annual growth of the BCIS Materials Cost Index. Between January and September, steel and timber categories saw the greatest hikes, with high volatility in nearly all materials categories.2

There are now 244,000 fewer workers in the construction sector compared to three years ago, according to the Office for National Statistics.3 The Construction Leadership Council has warned that price inflation and a diminishing labour supply are now of greater concern than product availability in most construction sectors.4

This challenging geopolitical backdrop should be considered when setting sums insured under a property damage/business interruption (PD/BI) programme, or firms risk being significantly underinsured. A PD/BI programme covers loss of income during periods when a firm cannot do business as usual due to an unexpected event. Most policies will cover business interruption due to damage caused to premises or equipment by fire, storm or flooding and the breakdown of essential equipment.

Communication is key

Regular communication with your broker is essential to ensure they have a clear and complete picture of:

  • All business activities
  • Business continuity arrangements and if they are adequate to respond to a significant problem given current delays
  • Exposures requiring BI insurance cover and for how long

Pre-pandemic, applying small year-on-year increases to historic values may have produced inadequate sums insured – even when prices were stable.

If the original sum insured was far too low, applying nominal increases to asset values will not correct the problem of major underinsurance. Declaring written down or market valuations of assets should also be avoided as these are likely to be substantially different to reinstatement costs.

Underinsured property assets could lead to a variety of exposures in the event of a claim:

  • Claims payment does not cover the full property repair/rebuild cost
  • Funds may not be available to complete the rebuild
  • Increased borrowing may be required
  • Negative impact on balance sheet
  • Complex negotiations with insurers
  • Dispossessed leaseholders and tenants
  • Extended rebuild period
  • Exposure to potential legal action for inadequate levels of cover from lenders and leaseholders
  • Brand and reputational damage

Know your worth

A Building Valuation Survey, also known as a Reinstatement Cost Assessment (RCA), is a professional assessment of the total property rebuilding costs. It includes an onsite valuation of the property and peripheral features and takes into account the following:

  • Unusually-shaped buildings
  • Unusual locations
  • Listed buildings
  • Buildings with unusual fixtures and fittings
  • Use of unusual building materials
  • Demolition costs and professional fees
  • VAT costs where appropriate

Firms are expected to carry out an RCA every 3-5 years, often with annual desktop assessments to ensure 100% protection. Nevertheless, regular professional valuations of buildings and machinery are not always common practice.

An up-to-date RCA provides businesses with the understanding they need regarding sums insured. Through our strategic partnership with international asset consultants, Gallagher has the expertise to ensure your current assets are covered.

Our providers audit current values to confirm they are reasonable and provide invaluable insight into the operational business issues that could influence levels of cover.

This service covers UK material risks and key elements of business interruption and provides an initial investigation to determine whether existing declared values are reasonable.


This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note we have relied on information sourced from third parties and we make no claims as to the completeness or accuracy of the information contained herein. You should not act upon information in this bulletin nor determine not to act, without first seeking specific legal and/or specialist advice. Our advice to our clients is as an insurance broker and is provided subject to specific terms and conditions, the terms of which take precedence over any representations in this document. No third party to whom this is passed can rely on it. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to fullest extent permitted by law. Should you require advice about your specific insurance arrangements or specific claim circumstances, please get in touch with your usual contact at Gallagher.