Underinsurance is an often-overlooked risk for building owners and operators, but one that can have severe financial implications. It’s not just about rebuild costs but also about compliance, risk management, and financial resilience. Surprisingly, several factors contribute to underinsurance, and they go beyond inaccurate building valuations. From outdated or fragmented documentation to regulatory shifts and complex valuation processes, each of these factors can leave property owners financially exposed when it matters most.
In this article, we’ll dig deeper into the main causes of underinsurance, including documentation, valuation accuracy, and regulatory challenges, and show how proactive data management is the best defence against these risks.
1. Inaccurate Valuations and Rising Rebuild Costs
At the heart of underinsurance lies inaccurate or outdated property valuations. Without precise, current valuations, insurance policies are based on estimates rather than real numbers. This problem is exacerbated by the surge in rebuild costs over the past few years. According to RICS, rebuild costs have increased by 13% annually, with materials like steel, timber, and specialist cladding seeing particularly steep hikes.
Why are valuations often inaccurate?
Outdated Assessments: Buildings are often valued once, with few follow-ups. However, construction costs, regulatory standards, and property values shift, meaning that an insurance valuation from five years ago may now be completely insufficient.
Complexity of Valuation: Each building has unique features, from materials to structural elements, that need individual assessment. Valuers who rely on averages rather than specifics can miss these nuances, which impacts the rebuild cost calculation.
Failure to Include Recent Upgrades: Owners often neglect to document and reassess valuations after upgrades or refurbishments, which can add significant value to a property. A recent study by Aviva found that nearly 30% of buildings are underinsured due to missing renovation records.
2. Fragmented and Incomplete Documentation
Underinsurance is often a data problem. If building documentation—materials, layouts, safety features, or upgrades—is missing or disorganised, insurers can’t accurately assess the rebuild value or risk profile. Fragmented information results in insurers basing valuations on conservative assumptions, which leads to coverage gaps.
How poor documentation leads to underinsurance:
Inaccessible or Scattered Records: When building data is spread across multiple files, departments, or even paper records, there’s a higher chance of missing crucial information during valuations.
Missed Details on Materials and Structural Features: Insurers calculate rebuild costs based on specific materials and construction methods. For example, fire-retardant materials or reinforced steel can significantly impact costs, but these are often overlooked in generalised records.
Inaccurate Building Use Records: A building’s purpose affects its insurance needs—commercial spaces, for instance, often have different risk factors than residential ones. Inconsistent occupancy and usage records can skew valuations and leave policies inadequate.
Without a streamlined system for data organisation, these documentation issues compound over time, increasing the risk of underinsurance.
3. Insufficient Compliance with Regulatory Standards
The introduction of stricter regulations—particularly in the UK with the Building Safety Act—means that insurers expect higher standards of documentation and transparency. Compliance requirements often necessitate specific building features, regular updates, and thorough documentation to prove adherence.
How regulatory factors lead to underinsurance:
Complex and Changing Regulations: For instance, the Building Safety Act requires a ‘golden thread’ of information, meaning that owners must keep thorough, updated records. Failure to meet these requirements not only affects compliance but also impacts insurance, as insurers may be unwilling to fully cover non-compliant buildings.
Risk-Based Premium Adjustments: Insurers often adjust premiums or limit coverage based on compliance status. Properties that lack up-to-date, compliant information may see higher premiums or even reduced coverage, leading to potential underinsurance.
Penalties and Costly Reassessments: Non-compliance can result in fines or the need for costly building upgrades, which might not be reflected in insurance policies if these upgrades aren’t documented and re-assessed.
Staying ahead of compliance requirements isn’t just about avoiding fines—it’s also about ensuring that insurance policies accurately reflect a building’s current risk profile and value.
4. Underestimation of Rebuild Time and Cost Escalation
The time needed to rebuild or repair a property is often underestimated, leading to coverage shortfalls in business interruption insurance and higher costs than initially calculated. If the rebuild timeline is longer than expected, operational costs increase, which isn’t always factored into the insurance policy.
Why rebuild time matters in underinsurance:
Supply Chain Disruptions: Recent supply chain issues have extended rebuild times as certain materials become harder to source. Insurers base policies on typical timelines, which no longer reflect today’s reality.
Labour Shortages and Inflation: Skilled labour is becoming more expensive and less available, with labour shortages adding to delays and costs. The Office for National Statistics reported that construction sector wages increased by 10% in 2023 alone, which impacts overall rebuild costs.
Unforeseen Regulatory Delays: Safety inspections, permits, and other regulatory processes can add unexpected time to a rebuild, increasing both project costs and operational downtime.
When building owners underestimate rebuild time, they leave themselves exposed to additional costs that their insurance policy may not cover. Ensuring that insurers understand these risks requires accurate, regularly updated documentation.
5. Lack of Access to Centralised, Updated Information
One of the most significant challenges in preventing underinsurance is ensuring that information is always current. Buildings are dynamic assets, with changes happening constantly—from new materials and renovations to tenant changes and regulatory updates. Traditional record-keeping methods often fall short of maintaining an accessible log of these changes.
The impact of outdated or inaccessible information:
Delayed Updates to Insurance Policies: With no easy way to update insurers on changes, policies often lag behind the building’s actual value or risk level.
Reactive, Rather than Proactive, Insurance Adjustments: Insurers are more likely to adjust coverage if they’re kept informed of updates in real-time. Without this access, adjustments only happen during renewals, which may come too late.
Missed Opportunities for Risk Adjustments: Owners who invest in risk-reducing upgrades—such as fire safety features or structural reinforcements—could benefit from lower premiums. But if these updates aren’t logged in real-time, they won’t be reflected in the insurance valuation.
How Building Passport Can Help
For property owners, managing accurate building information across these various factors requires a system that centralises, organises, and ensures easy access to critical data. Building Passport provides a purpose-built digital repository that acts as a secure storage solution for all essential building information, from materials used in construction to historical upgrades and compliance documentation.
George Faulkner, Founder and Director of Merlin Insurance Brokers says,
"As insurance brokers, collecting building information can be a slow process with significant information gaps incurring a risk of misrepresenting to insurers, potentially leading to claims not being paid.
Building Passport reduces the time and therefore the cost of arranging insurance, whilst improving the accuracy of information."
Building Passport’s functionality ensures owners are better equipped to prevent underinsurance by organising and storing data in one place. Its structured document management and reminder features make it simple to track compliance needs, such as notifying users when inspection certificates or safety documents are due for renewal. By eliminating data silos, Building Passport enables users to keep data current, accessible, and well-organised, supporting accurate valuations and minimising the risk of underinsurance.
With Building Passport, building owners can take a proactive role in managing their building data. This leads to better operational resilience, fewer surprises, and a significant reduction in the risks associated with underinsurance.
Conclusion
The underlying causes of underinsurance are varied and complex, but they all boil down to one central issue: incomplete, outdated, or inaccessible building information. From rising rebuild costs to compliance challenges and valuation complexities, there are multiple risk factors that require a robust, real-time data management approach.
By investing in accurate and organised building data through platforms like Building Passport, property owners can protect themselves against the costly repercussions of underinsurance. In a world where change is the only constant, having a reliable, accessible source of truth for building information isn’t just practical—it’s essential for financial security and operational peace of mind.
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