Research has revealed that 46% of commercial properties are underinsured, with the average shortfall being 40%. If not urgently addressed, this will open commercial property owners up to significant business interruption risks.

Nearly half (46%) of commercial properties are underinsured, posing a “significant threat to businesses”, according to research from insurance broker and risk management company Gallagher.

The research, shows that the average shortfall in cover currently sits at around 40%. And nearly seven in ten (67%) claims managers have been forced to reduce or reject claims in the last year due to underinsurance.

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What’s changed?

The significant gap between the correct valuation of properties is being caused by the UK’s lengthy inflationary environment with the cost of materials alone increasing by 36% since 2020 and labour costs up 7% in just the last year.

However, some 37% of claims managers felt the insurance gap was also being driven by commercial property owners not carrying out regular valuations of their premises.

The Royal Institution of Chartered Surveyors (RICS) recommends that a full reinstatement cost assessment is undertaken every three years, as well as when significant changes, such as an extension, are made to a building.

Over half (62%) of claims managers said the issue had got progressively worse over the last five years, leading to difficult conversations with underinsured property owners.

Gallagher claims director Phil Daly said: ”Clearly, our research shows that the issue of underinsurance is not going away and has actually increased over the last five years.

“This poses a significant threat to businesses who may find themselves having to foot some of the costs of rebuilding or repairing their premises.”

The impact on business interruption

In the event of damage, 96% of claims managers interviewed said property rebuild and repair times had also increased over the last five years.

As a result, 54% of claims managers said business interruption (BI) cover was not always adequate.

If insurance does not cover the full repair or rebuild cost, or reinstatement, owners could find themselves having to borrow money to foot some of the costs when budgets are already stretched.

It could also increase the risk of an extended period of business interruption.

Daly said: “Challenges, such as supply chain disruption and increased demand for materials, means that owners could face longer repair times, which carries a serious risk of BI.”

To avoid loss, Daly said it was “crucial” that commercial property owners “take appropriate measures”.

“This data shows how important it is for property owners to work with a risk management specialist when insuring their property,” he added.