Underinsurance Business

What underinsurance means for a business?

Underinsurance is when your business is insured for less than it would cost to put things right after a loss.

That loss could mean:

Repairing or rebuilding your premises.
Replacing your stock, plant, machinery, or office equipment.
Covering lost income while you can’t trade.

Business cover protects more than a building. It protects everything that keeps you trading. If anything is undervalued, your payout will be cut, even on small claims. You’ll have to cover the gap yourself.

Why business underinsurance happens and why it’s getting worse

Underinsurance often builds up without you noticing. Most business owners only realise there’s a gap when they make a claim, and by then, it’s too late.

Here are the most common reasons we see in the Channel Islands:

Rising costs

Prices are climbing across the board. In Jersey, goods and services went up 2.6% last year, and building costs rose even faster. Replacing stock, buying equipment, or hiring contractors now costs more than when you first set your cover.

Higher construction costs

Tender prices for building work rose 2.3% in early 2025. On the islands, costs are even higher because materials and labour must be imported. If your sums insured use old figures, they may already be too low.

Business growth

You’ve hired more staff, added new machinery, or hold more stock. But your policy still reflects the size of your business from years ago.

Wrong valuations

If you insured tools or machinery at second-hand prices, you’ll need to replace them at today’s new prices. The gap can be huge.

Business interruption gaps

Getting back to full trading now takes longer. Delays in supply chains, labour shortages, and waiting for specialists can push downtime past your policy period.

The real risk if you’re underinsured

Being underinsured can hit your business in three ways:

Smaller payouts:

Most policies have an "average clause." If your cover is below the true value, your payout is cut by the same percentage, even on small claims.

Example: If you're 25% underinsured, you'll get 25% less on your claim.

Out-of-pocket costs:

Your payout may not cover all repairs or replacements. You’ll need to fund the rest yourself.

Longer downtime:

Without enough funds to fix everything quickly, your business may stay closed longer. That can mean lost customers, missed contracts, and lasting reputational damage.

Example: Local bakery

Total value of premises, ovens, fridges, stock, and fittings: £200,000.
Policy covers: £150,000 (25% less than the real value).
A fire causes £80,000 of damage.
With the average clause, the insurer pays 75% = £60,000
You have to find £20,000 before you can reopen.

Index-linking and Day One cover

Some policies use index-linking or Day One clauses to limit underinsurance. They raise cover in line with inflation or growth. But if your starting sums are too low, they won’t close the gap.

Why this matters

Underinsurance is a top cause of complaints in UK and Channel Islands business insurance. Many firms only find out when they claim, and that’s when the strain hits hardest.

How to check if your business is underinsured

Step 1: Find your rebuild cost
Your building cover should match the full cost to rebuild from scratch.

Include:
- Demolition and site clearance.
- Professional fees (architects, surveyors, engineers).
- Labour and material costs are higher on the islands because of shipping and limited supply.
Tip: Get a professional valuation for accuracy.
Step 2: Value your assets and stock
Work out the cost to replace everything at today’s prices. Include:
- Stock at cost price.
- Plant, machinery, and tools.
- Fixtures, fittings, signage, and displays.
- Items stored off-site, or in storage units.
Step 3: Review your business interruption cover
Review your business interruption cover:
- Check your indemnity period: many businesses now need 18–24 months to recover, not 12.
- Update your gross profit figure to current trading levels.
- Consider extra expenses like wages, temporary premises, and hire of replacement equipment.
Step 4: Take action if you’re underinsured
- If your policy limits are lower than your totals, you’re underinsured. That means your payout could be reduced, and you’ll have to cover the rest.
- If you discover a gap, call us. Our brokers can update your policy so it matches your real needs today not the needs you had years ago.

Commonly underinsured business items

Some items cost more to replace than owners expect. Many policies won’t cover them in full unless they’re listed separately.

Here are the items we see underinsured most often:

Specialist machinery and tools

Even small items can be costly to replace new.
Seasonal or high-value stock

Especially ahead of busy periods like summer or Christmas.
Fittings and fixtures

Shelving, lighting, signage, and display units are often overlooked.
Items stored off-site

Stock in storage units, or equipment kept at client sites.

Ways to avoid being underinsured

You can stop underinsurance before it starts. Here’s how:

Review your cover every year.
Update after changes (new equipment, business expansion, more stock).
Value at today’s prices, not what you paid years ago.
Check your business interruption indemnity period.
List high-value items separately.
Get professional valuations for specialist machinery, heritage properties, or custom fittings.
Keep good records (receipts, valuations, inventories).