Most home insurance policies include a sum insured, which is intended to reflect the cost of rebuilding a home from the ground up. In practice, that figure is often inaccurate.

Underinsurance is a risk which remains widespread across the UK. Research from the Building Cost Information Service (BCIS) and Royal Institution of Chartered Surveyors (RICS) has consistently shown that a large proportion of properties are insured below correct rebuild value. Industry estimates indicate:

Around 70–80% of UK commercial properties are underinsured (BCIS).

Between 20–40% of UK residential properties may be underinsured (various insurer and RICS-aligned studies).

Average shortfalls are often reported at 20–40% below true rebuild cost (BCIS, insurance market reports).

Rebuild cost is not market value

Underinsurance issues often comes down to how the sum insured is set in the first place. Market value is frequently used as a reference point, but it does not reflect the cost of reinstating a property after a loss.

A true rebuild figure must account for

• Demolition
• Debris removal
• Labour
• Materials
• Professional fees
• And compliance with current building regulations.

BCIS data shows construction costs increased sharply between 2021 and 2023, yet many policies have not been reviewed to reflect this shift, leaving cover misaligned with current conditions.

Index linking is a tool commonly applied to help keep cover up to date. It works by increasing the sum insured each year, typically in line with BCIS indices, so that it tracks changes in construction costs over time. This provides a level of ongoing adjustment without requiring manual updates at each renewal.

However, index linking operates on the figure already in place. It maintains the position of a policy, rather than correcting it. If the original sum insured is too low, the shortfall remains and continues to scale. As noted by the Association of British Insurers (ABI), index linking is a maintenance tool, not a validation of adequacy.

How underinsurance affects a claim

When underinsurance is identified, insurers will often refer to something called an average clause, which is included in most property insurance policies. In simple terms, this means that if a property is insured for less than its full rebuild cost, any claim payment may be reduced to reflect that shortfall. The insurer will therefore only pay a proportion of the loss, with the remaining balance becoming the responsibility of the policyholder.

For example, if a property is insured for 70% of its true rebuild cost, any claim may be settled at 70% of the loss, leaving the remaining 30% to be met by the policyholder. At a time when property claims can reach tens or hundreds of thousands of pounds, as reflected in ABI data, even a modest shortfall can translate into a significant financial gap.

Underinsurance can also shape how a claim progresses. Where sums insured are clearly inadequate, there is often greater scrutiny around scope and valuation. The Chartered Insurance Institute (CII) notes that underinsurance drastically increases the likelihood of disputes, which can extend validation periods and delay settlement.

Regulatory focus is increasing

There is increasing regulatory attention on underinsurance across the insurance market. Under the Financial Conduct Authority (FCA) Consumer Duty, firms are required to avoid foreseeable harm and support customers in achieving good outcomes. Underinsurance is now recognised as a foreseeable risk, particularly where policyholders are not given clear guidance on how to set and maintain an accurate sum insured.

This has placed greater emphasis on transparency, documentation, and ongoing review. Insurers and brokers are expected to make it clear how sums insured are derived and to highlight the importance of keeping them up to date.

What policyholders can do

A current valuation remains the most reliable way to confirm whether cover is adequate. RICS guidance recommends Reinstatement Cost Assessments every 3–5 years, supported by index linking between reviews. Without a recent valuation, the sum insured remains an estimate.

Policyholders who are unsure of their position should review how their sum insured was originally calculated. This includes checking whether it was based on a professional assessment or a general estimate, and whether it has been updated to reflect changes in construction costs or the property itself.

Insurers and brokers can provide clarity on how the figure was set and whether it still reflects the cost of rebuilding the property. Where there is uncertainty, a reassessment can help align the level of cover with current conditions.

Underinsurance rarely becomes apparent when a policy is taken out. It tends to emerge at claim stage, when the policy is tested and the financial outcome is already fixed. Reviewing cover in advance provides a clearer understanding of how a policy will respond when it is needed.