Underinsurance: The Risk Most Businesses Don’t Know They’re Carrying

September 3, 2026

In short: Underinsurance means your policy’s sums insured are lower than the true cost of rebuilding or replacing what you’re covering. Over 45% of UK commercial properties are underinsured. The sum insured is the client’s responsibility to declare, and if it’s below the true value, the average clause can reduce a payout proportionately. Reviewing your sums insured helps close the gap.

Underinsurance is surprisingly common and can develop gradually as rebuild costs, stock values and equipment costs change over time.


This is called underinsurance. Here’s what it means, and what can help.



What underinsurance actually is?

Underinsurance happens when the amount you’ve insured your business for is lower than what it would really cost to replace or rebuild. This can apply to your building, your stock, or your equipment.


It happens gradually. Rebuild costs go up. Stock values rise as the business grows. But the figures on the policy often don’t get updated to match.


How common is this?

More common than most people expect. Research from 2025 found that over 45% of UK commercial properties are underinsured, with the average building insured for only around 70% of its true rebuild cost.

Understanding the average clause

Most commercial policies include something called the average clause, and it helps to understand the principle behind it rather than just the effect.


When you take out a policy, you are responsible for declaring an adequate sum insured, a figure that reflects the true cost of rebuilding or replacing what’s covered. The insurer prices your premium on that basis. If the declared figure turns out to be below the true value, whether by choice or in error, the insurer can effectively treat you as having self-insured that same proportion of the risk yourself.

The core idea: the insurer only pays out in the same proportion as the amount you insured.


  • Your building would really cost £1,000,000 to rebuild.
  • You only insured it for £600,000.
  • So you’ve insured 60% of its true value (£600,000 ÷ £1,000,000).


That 60% is the proportion the insurer will pay on any claim, no matter how big or small. So if a fire causes £100,000 of damage:


  • The insurer pays 60% of that claim: £60,000
  • You’re left to cover the other 40% yourself: £40,000


This applies even though the claim itself (£100,000) is nowhere near your full sum insured (£600,000) or the true rebuild cost (£1,000,000), average is applied to every claim under the policy, not just a total loss.


Seen this way, average clause isn’t a penalty so much as a reflection of the fact that you’ve been carrying part of the risk yourself, without necessarily intending to.



Where the responsibility sits

We don’t advise clients on what their rebuild value should be. Our role is to help you understand what information insurers require and to make sure your policy is structured correctly, but selecting an appropriate sum insured is our client’s responsibility.

If you’re not sure what your rebuild cost actually is, we can introduce you to specialist rebuild-cost assessors, who can carry out a desktop or in-person assessment. Clients working with us can access reduced fees with one of our recommended suppliers. That’s a reduction in the assessor’s fee, not in your insurance premium.


What can help close the gap?

The most effective way to close the gap is to make sure your sums insured are accurate in the first place, and to keep them that way. Rather than treating it as a one-off exercise, it's worth building a check into your renewal process each year, so the figures are reviewed before they have the chance to drift out of date.


What’s worth doing now

  • Ask for your rebuild cost and stock values to be properly reassessed, not just carried over from last year, and speak to us about a specialist assessment if you’re unsure
  • Review your sums insured at every renewal
  • Build a review into your renewal process, rather than leaving it to be tested by a claim


A review now is straightforward. Establishing the right figures at claim stage, after the event, is much harder.


Frequently asked questions


What is underinsurance?

Underinsurance is when your sums insured are lower than the true cost of rebuilding or replacing what’s covered, whether that’s a building, stock, or equipment.


What is the average clause?

The average clause reflects the principle that you are responsible for declaring an adequate sum insured. If you’ve declared less than the true value, the insurer can treat you as having self-insured that proportion of the risk, and reduce a claim payout by the same percentage.


Does The Willows Insurance tell me what my rebuild value should be?

No. We help you understand what insurers require and structure your policy correctly, but the sum insured is your responsibility to select. If you’re unsure, we can introduce you to a specialist rebuild-cost assessor.


How can I reduce the risk of underinsurance?

Get rebuild costs and stock values properly reassessed at every renewal, rather than carrying over last year’s figures, and review your cover with your broker regularly.


Sources - BTG Eddisons, 2025 research on UK commercial property underinsurance

Why the Difference Matters for Your Insurance

September 3, 2026
In short: A labour-only subcontractor works under your direction and is generally treated as your employee for insurance purposes. A bona fide subcontractor works independently, brings their own tools, and should have their own insurance. Getting this wrong can cause problems with cover if a claim occurs. If you hire subcontractors, this question matters more than it sounds like it should: are they labour-only, or bona fide? Get the answer wrong, and your insurance may not cover what you think it does. What is a labour-only subcontractor? A labour-only subcontractor works under your direction. You tell them what to do, when to do it, and how. You supply the tools and materials. You set the hours. Insurers do not simply go by what someone calls themselves. What matters is the actual working relationship: who directs the work, who controls how and when it happens, and who supplies the tools and materials. Where that pattern looks like direction and control by you, the individual is generally treated as your employee for insurance purposes, even if they describe themselves as self-employed. That means you are likely responsible for their health and safety, and need to make sure they’re covered under your own employers’ liability insurance, the same as any staff member. What is a bona fide subcontractor? A bona fide subcontractor works under their own direction. They bring their own tools and materials. They’re hired to complete a specific job, usually a specialist one, like plumbing or electrical work, and they invoice you for it rather than being paid an hourly wage. Because they operate independently, responsibility for their own health and safety generally sits with them, and it’s sensible for them to hold their own liability insurance, since your policy is not designed to cover their negligence. A quick way to tell them apart Ask these questions about the person you’re hiring: Do you pay them hourly, weekly, or monthly? That points to labour-only. Do they invoice you a fixed price for the job? That points to bona fide. Do you supply the tools and materials? That points to labour-only. Do they bring their own? That points to bona fide. Do you tell them how and when to do the work? That points to labour-only. Do they work to their own method, under their own supervision? That points to bona fide. These questions are a helpful starting point, but insurers will ultimately look at the reality of the working relationship as a whole, so it is worth reviewing this regularly rather than relying on a single answer. Why getting this wrong is costly If you treat someone as bona fide, but the actual working relationship looks more like labour-only, you may find they were not properly covered under your employers’ liability policy at the point cover was needed. That can mean a claim being contested or delayed at exactly the moment you need it to pay out. It can also carry Health and Safety Executive implications, if it turns out the right cover was not in place for someone who was, in practice, working under your direction. What to do about it Go through your current subcontractors and work out, honestly, which type each one is Don’t rely on what they call themselves, look at how the work actually happens Tell your broker about any labour-only subcontractors, so they’re properly included in your employers’ liability cover Ask for proof of insurance from any bona fide subcontractor you use, and keep it on file This is a common point of confusion, and it’s an easy one to get right once you know what to check. If you’re not sure how your current subcontractors are classified, it’s worth a conversation with your broker so it can be reviewed properly before it becomes a claims problem. Frequently asked questions Is a labour-only subcontractor the same as an employee for insurance purposes? Generally, yes. Insurers look at the actual working relationship, particularly who directs and controls the work, rather than simply what someone is called. Where that relationship looks like direction and control by you, they are typically treated as your employee. Do bona fide subcontractors need their own insurance? It’s sensible for them to. A bona fide subcontractor works independently, so it’s worth them holding their own liability insurance, since your policy isn’t designed to cover their negligence. What happens if I misclassify a subcontractor? A claim involving a misclassified subcontractor can be contested or delayed, and there may also be Health and Safety Executive implications if the right employers’ liability cover was not in place. 

Martyn’s Law: What It Means If You Run a Venue

September 3, 2026
In short: Martyn’s Law (the Terrorism (Protection of Premises) Act 2025) requires venues expecting 200 or more people at once to prepare for the risk of a terrorist attack. Smaller “standard tier” venues (200 to 799) need basic procedures. Larger “enhanced tier” venues (800+) need a fuller risk assessment. Full enforcement is expected from spring 2027. Complying with the law is separate from holding terrorism insurance, and it’s worth checking whether your cover addresses both. If your business is a venue, pub, hall, or event space, a new law may soon apply to you. It’s called Martyn’s Law. Here’s what it means, in plain terms. What Martyn’s Law is Martyn’s Law is a new act of parliament. Its full name is the Terrorism (Protection of Premises) Act 2025. It’s named after Martyn Hett, who died in the 2017 Manchester Arena attack. It became law on 3 April 2025. It requires certain premises and events to prepare for the risk of a terrorist attack, and to have a plan for keeping people safe if one happens. Does it apply to your business? It depends on how many people can reasonably be expected on your premises at the same time. There are two tiers: Standard tier: 200 to 799 people. This covers many pubs, village halls, community centres, small theatres, and independent cinemas. Enhanced tier: 800 people or more. This covers larger venues like stadiums and big event spaces. If your venue is smaller than 200, the law doesn’t apply to you yet, though the government has the power to lower these thresholds in future. What you’ll need to do? If you’re in the standard tier, the requirements are fairly simple. You’ll need basic procedures in place, like staff training and an emergency plan, and you’ll need to register with the Security Industry Authority. If you’re in the enhanced tier, the requirements go further. You’ll need to assess your specific vulnerabilities and take reasonable steps to reduce them. When do you need to comply? There’s no need to panic. The government has allowed at least 24 months from Royal Assent before enforcement begins, meaning full compliance isn’t expected until spring 2027. But it’s sensible to start preparing now rather than leaving it until the deadline. Martyn’s Law and terrorism insurance are two different things It’s worth being clear about a distinction that’s easy to miss. Martyn’s Law is about preparedness: having the right procedures and plans in place to protect the people on your premises if an incident happens. Terrorism insurance is a separate matter entirely: it’s about the financial consequences to your business if an incident occurs, covering things like property damage and business interruption. Complying with Martyn’s Law does not mean you automatically hold terrorism cover, and holding terrorism cover does not meet your Martyn’s Law obligations. The two sit alongside each other rather than substituting for one another. It’s worth checking whether terrorism is already included within your existing commercial property or business interruption cover, or whether it needs to be arranged separately. This varies policy to policy, so it’s not something to assume either way. What to do next Work out your realistic peak capacity. Use fire safety limits, licensing figures, or past attendance data to help. Check which tier that puts you in. Start putting basic emergency procedures in place if you haven’t already. Check whether terrorism cover is included in your existing insurance, or whether it needs arranging separately. Talk to your insurance broker about both your Martyn’s Law preparations and your cover. Many smaller venues haven’t heard of Martyn’s Law yet, so if this is the first you’re reading about it, you’re not behind, just in good time to get ahead of it. Frequently asked questions What is Martyn’s Law? Martyn’s Law is the Terrorism (Protection of Premises) Act 2025, a UK law requiring certain venues and events to prepare for the risk of a terrorist attack. What size venue does Martyn’s Law apply to? It applies to venues expecting 200 or more people at the same time. Standard tier covers 200 to 799 people, and enhanced tier covers 800 or more . Is terrorism insurance the same as complying with Martyn’s Law? No. Martyn’s Law is about preparedness and protecting people on your premises. Terrorism insurance is about the financial consequences if an incident occurs. You may need both, and they don’t substitute for one another. When do I need to comply with Martyn’s Law? There’s an implementation period of at least 24 months from Royal Assent in April 2025, so full enforcement is expected from spring 2027. Sources: ProtectUK, Martyn’s Law overview - Liverpool City Council, Martyn’s Law guidance - Policy Pros, Martyn’s Law capacity assessment guide