Underinsured by a third, and the claim that proves it

A business insured for 500,000 against a building that would cost 750,000 to reinstate is not covered in full up to 500,000. It is covered for two thirds of everything. That is the condition of average, it sits in almost every commercial property policy, and it is the single most expensive clause most policyholders have never read.

It applies to small claims too

This is the part that surprises people. A 10,000 escape-of-water claim feels comfortably inside a 500,000 policy, so the assumption is that it pays in full less the excess. It does not. The insurer applies the same two thirds, pays 6,667 before the excess, and the difference is not recoverable from anyone.

The proportion withheld does not depend on the size of the claim. It depends only on how far the sum insured sits below the reinstatement cost. A business 33% underinsured loses 33% of every claim it ever makes under that policy.

Why sums insured drift

Almost nobody sets a sum insured wrongly on purpose. They set it correctly once, and then leave it. Rebuild costs move with materials, labour and regulation, and a figure that was right four years ago is routinely 20 to 30% light today. Index linking helps and does not solve it, because it tracks a general index rather than your building.

What to do about it

Get a reinstatement cost assessment rather than an estimate, and repeat it every three years or after any material change to the building. The assessment costs a few hundred pounds. The gap it finds is usually measured in tens of thousands.