Author: Mark Eade DipCII
For businesses, particularly those in the Hospitality & Leisure (H&L) sector, navigating these turbulent times demands sharp financial insight and strong risk management strategies. In such an environment, H&L businesses cannot afford to leave themselves underinsured, facing potentially high financial losses.
From bustling pubs and busy hotels to popular leisure centres and tourist attractions, the H&L sector is vulnerable to external events. Having adequate insurance coverage isn’t just a safety net but a vital foundation for peace of mind and business continuity.
What is underinsurance?
Underinsurance occurs when a business’s insurance coverage is insufficient to match the actual value of its assets or the potential financial losses it could face. The consequences can be severe.
Take the example of a fire damaging a hotel kitchen. If the business is underinsured, the insurance payout may cover only a fraction of the repair or replacement costs, leaving the owner to shoulder a significant burden. Beyond the direct property damage, underinsurance severely impacts business interruption coverage. With insufficient funds to quickly rebuild and resume operations, the hotel will face prolonged closure, leading to substantial lost revenue from cancelled events and diminished customer loyalty. The Business Interruption indemnity period must also be correctly calculated, to ensure that enough time is given for full repairs and a return to trading position the day before the loss. This financial strain can be crippling, potentially forcing the business into long-term debt or even closure.
How underinsurance leaves businesses vulnerable
Recent economic shifts have clearly illustrated the dangers of underinsurance in the UK's H&L sector. In the years following the COVID-19 pandemic, significant inflation in building material costs left many businesses unknowingly underinsured for their property. Consequently, if these establishments were to experience damage requiring rebuilding, their existing coverage might only cover a fraction of the actual expenses.
This shortfall, coupled with rising operational costs such as increased National Insurance (NI) contributions and minimum wage rates, has further exposed the vulnerability of underinsured businesses. This is particularly evident in the hospitality sector, which is now experiencing insolvency rates not seen since the 2008-2009 financial crisis.
In January 2025 alone, nearly 2,000 companies went bankrupt, an 11% increase year on year1. This stark number highlights the harsh reality: many businesses remain insufficiently protected and underinsured against economic shocks.
Key types of underinsurance for H&L businesses
Underinsurance comes in many different forms, many of which are often overlooked but can have significant financial consequences:
1. Property (buildings and contents)
This is the most common type, and occurs when the declared value of buildings or contents, such as furniture, equipment and stock is lower than the actual cost of reinstatement or replacement.
For example, a pub owner who hasn’t updated their property valuation could find that, following a fire, their policy only covers part of the rebuilding cost, leaving them with a significant shortfall.
2. Business interruption
This type of cover helps replace lost income when business operations are disrupted by an insured event, such as a fire or flood. However, with significant inflationary pressures driving up the costs of goods and services, coupled with rising construction delays and persistent supply chain issues, the indemnity period (the duration for which the policy pays out) may no longer provide adequate financial support to recover lost income and operational capacity fully.
3. Ordinance and law
After damage, older properties may need to be brought up to modern building codes. Local authorities could mandate costly upgrades (e.g., accessibility features and sprinkler systems), which aren’t typically covered under standard property insurance.
4. Dependent business income
Many H&L businesses rely on nearby attractions, venues or events for footfall. If a key partner or attraction suffers disruption, the knock-on impact can be severe. A restaurant next to a popular theme park, for instance, may see a sharp drop in customers if the park closes unexpectedly. Dependent business income coverage helps offset the resulting revenue loss.
5. Cyber liability
As H&L businesses increasingly rely on digital systems to store sensitive customer data, they can become prime targets for cyber-attacks. A breach could result in operational shutdowns, legal penalties and reputational harm.
Understanding the average clause
Found in many insurance policies, the average clause is crucial for H&L operations and can significantly affect the payout if a property is underinsured. In simple terms, if the insured amount is less than the actual value of the property, the insurer may only cover a proportion of the claim.
For example, if a hotel valued at £1 million is only insured for £500,000 (half of its value) and sustains £200,000 in damage, the insurer might only pay £100,000, leaving the business responsible for the remainder. This can be a devastating hit for businesses already under financial strain.
Regulatory shifts
Looking ahead, upcoming regulations could have major implications for the UK’s H&L sector. These include:
- The Terrorism (Protection of Premises) Act — ‘Martyn’s Law’
This legislation, passed in April 2025, will require operators of public venues, including hospitality businesses, to assess and mitigate the risk of terrorist attacks. It is likely to increase the need for specialist insurance coverage to manage potential liabilities linked to such incidents2. - Changes in alcohol pricing
Scotland’s minimum unit price (MUP) for alcohol increased from 50p to 65p in September 2024, and similar changes are being considered in Wales and Northern Ireland3. These shifts could impact both revenue and operational costs, making it even more important to have appropriate business interruption and liability coverage in place. There are no plans yet for MUP in England, but there are ongoing discussions and campaigns on whether it should be introduced. - Short-term rental registration scheme
Starting in 2025, short-term rental hosts will be required to register their properties. This adds a new layer of compliance and may prompt the need for updated insurance policies that align with regulatory requirements. - Employment law reforms
Upcoming changes to the Employment Rights Bill, which was initially passed in October 2024, will introduce new guidance on redundancy and rehiring practices. These reforms could increase employers' financial and legal exposure, underlining the importance of robust employment practices liability insurance4.
Protect your business
Underinsurance is a growing and often underestimated risk in the UK’s H&L sector. With insolvency rates climbing, operational costs surging and new regulations reshaping the landscape, businesses need to be even more aware of gaps in their coverage.
Crucial areas of protection, such as ordinance and law, dependent business income, cyber and environmental liability, are often neglected, leaving businesses exposed when the unexpected happens.
With the right guidance and expertise, these risks can be effectively managed, and H&L businesses can access tailored coverage that reflects their specific operational risks to safeguard their businesses.
To find out more, please contact one of our specialists today to review your current coverage and ensure your business is adequately protected.
