A common misconception is that the market value of a property is equated with its insurance value. In reality, these figures can differ substantially. The insurance value represents the cost to rebuild the property, encompassing expenses for materials, labour, permits and associated fees.
Increased demand for charitable services, declining donations and heightened competition are straining this sector’s resources. Many charities operate on tight budgets and rising insurance costs further limit funds for essential services.
What is underinsurance?
Industry analysis confirms that 79% of UK commercial properties and 70% of UK residential properties remain underinsured as of August 2024. Affected buildings typically secure only 63% of their required coverage value, creating a critical protection gap1. This matches last year's record-worst underinsurance assessment. Despite some improvement in coverage rates, many property owners still face substantial financial vulnerability.
Underinsurance can significantly impact claim settlements. Consider the following example:
| Insured rebuild cost | £1,000,000 |
| Actual rebuild cost | £2,000,000 |
| Underinsurance percentage | 50% |
| Fire claim | £300,000 |
| Settlement | £150,000 |
In the above example, as mentioned, there is a 50% underinsurance, and the claim payout is reduced in proportion to the coverage shortfall. For a £300,000 fire claim, only £150,000 is covered, leaving the charity to cover the remaining £150,000 shortfall, highlighting the financial risk of inadequate insurance.
With advancements in valuation technology, insurers can accurately assess underinsurance risks. This is especially crucial for listed properties, as local councils may require full restoration, regardless of an organisation's ability to secure adequate funds from their insurer.
Current drivers of property underinsurance
The primary driver of underinsurance is inflation, which has led to increased rebuilding costs. If a charity’s insurance coverage is based on outdated property valuations, it may not reflect current material and labour costs, leading to a payout shortfall. Here are some examples:
- By December 2024, key UK construction materials — including timber, steel, cement, concrete and bricks — recorded a cumulative price increase of 3.5% compared to the previous year2.
- Steel prices have surged substantially due to robust demand, production constraints and escalating raw material costs. Trade policies and global supply chain disruptions have further intensified these increases, significantly impacting dependent sectors.
- Concrete composite prices rose 12.4% year-on-year in March 2024, driven primarily by fuel costs, affecting both production and transportation expenses3.
- Lumber costs declined almost 14% in 2024 due to increased production, reduced import tariffs and decreased renovation demand4. However, this represents a strategic correction rather than a long-term trend reversal.
How can charities avoid underinsurance?
Conducting regular valuations
Ensuring properties and assets are valued accurately is crucial. Insurance should reflect the full rebuild cost, covering demolition, materials, and labour. Rebuild expenses can differ substantially from market value, particularly in fire or structural damage cases, where extensive repairs, compliance with updated building regulations and potential structural reinforcements can significantly increase costs.
Ensuring adequate cover for stock and equipment
Charities should focus on insuring stock based on its replacement cost rather than its potential sale value. This involves excluding reclaimable VAT and considering maximum stock levels at different operational stages.
Reviewing insurance policies regularly
Charities must review their policies following property improvements or particularly pronounced market fluctuations. Underinsurance can reduce claim payouts due to the ‘average clause’ applied by insurers. Coverage should include protection against natural disasters, fire, theft and other risks while balancing premiums and policy benefits.
Planning for business continuity
Rising costs are affecting reaccommodating and rebuilding timelines, so charities should assess the suitability of their indemnity periods. Many policies offer 12-to-24-month indemnity periods, but inflation and supply chain challenges mean reinstatement can take significantly longer. Organisations must ensure that business interruption coverage aligns with potential financial losses, including increased energy and supply costs.
Understanding the 'Average Clause'
The average clause represents a critical yet often misunderstood insurance provision. When property coverage falls below the required levels, this clause activates automatically. This operates on a proportional basis, reducing claim payments directly related to the degree of underinsurance.
For example:
If a charity's premises has a rebuild cost of £800,000 but are insured for only £640,000, the organisation is underinsured by 20%. Should a flood cause £20,000 in damage, the insurer may apply the average clause and pay only £16,000 (80% of the claim), leaving the charity responsible for the remaining £4,000. This demonstrates the financial risks of inadequate coverage and the need for accurate valuations to secure complete protection.
Fit-for-purpose insurance alignment is a key component of organisational resilience for UK charities. Inadequate coverage is a substantial risk to recovery. The resulting compensation gap following claims can threaten both rebuilding capacity and operational continuity, forcing trustees to make tough choices between asset protection and financial viability.
How can Gallagher help?
We can help advise and ensure your charity has the right insurance coverage, helping to safeguard against unforeseen losses. We can check your current insurance arrangements to identify potential gaps and help ensure that your insurance coverage works for you.
To find out more, please get in touch with Gallagher’s Charities SME & Affinity Team or call us on 0121 200 4951. We are here to support you.
