Underinsurance of buildings remains one of the most persistent - and costly - failures in commercial insurance. Industry studies in Ireland suggest the problem is widespread, with up to 90% of commercial properties possibly being underinsured1. Given that the building typically represents the largest single component of a risk, even modest miscalculations can translate into substantial financial exposure when a claim arises.
At the heart of the issue is a fundamental misunderstanding: the assumption that a
building’s sum insured should reflect its market value. All too often, purchase price or perceived sale value is used as a proxy. The language of the market hasn’t helped -
insurance professionals frequently refer to sums insured as “values,” reinforcing the
confusion. In reality, the correct basis is the reinstatement cost: the amount required to rebuild the property to its original specification following an insured loss. This distinction becomes painfully clear when lenders require formal valuations.
Borrowers are frequently surprised to discover a significant gap between their existing sum insured and the true cost of reinstatement. The result is often a last-minute scramble to increase cover - sometimes beyond what the incumbent insurer can accommodate - forcing a hurried search for additional capacity in already constrained markets.
What impacts can this have on your client?
The consequences of getting this wrong are not theoretical. Underinsurance triggers the application of the Average Clause, reducing claim payments in proportion to the shortfall. In practical terms, this can mean six- or seven-figure contributions from the insured toward what they believed was a fully covered loss. In more severe cases, particularly where underinsurance is deemed reckless, insurers may consider it a ‘gross misrepresentation’, with the potential to void the policy entirely.
Compounding the challenge is the volatility of construction costs. Reinstatement is a moving target. Inflationary pressures, labour shortages, supply chain disruption, and energy price volatility - exacerbated by current geopolitical tensions - continue to drive cost uncertainty. In Ireland, large-scale public investment programmes are adding further demand-side pressure to the construction sector. Against this backdrop, relying on outdated or approximate figures is increasingly untenable.
Certain property types introduce additional complexity. Protected or heritage buildings, for example, require specialist materials and skilled trades, often at premium cost. Regulatory oversight can extend timelines and inflate budgets, as conservation authorities enforce strict standards for repair and reinstatement. In these cases, not only must sums insured be carefully assessed, but indemnity periods for business interruption or loss of rent should typically extend to at least 24 months to reflect realistic rebuild timelines.
So, what does good practice look like in 2026?
For most commercial properties, a professional reinstatement valuation is no longer optional, it is essential. For smaller or residential let portfolios, tools such as the Society of Chartered Surveyors Ireland (SCSI) rebuild calculator can provide a useful baseline, but they should not replace expert advice where complexity exists. Once established, sums insured should be subject to appropriate indexation, with the caveat that standard policy uplifts (often around 15%) are designed to track general inflation, not correct an initially inadequate figure.
Regular review is equally critical. A three-year revaluation cycle is a sensible minimum in stable conditions; in today’s environment, more frequent reassessment may be warranted for higher-value or higher-risk assets.
Ultimately, accuracy at inception is what enables the insurance mechanism to function as intended. Correct sums insured allow insurers to deploy capacity efficiently, price risk appropriately, and, most importantly, deliver on the promise of indemnity when it matters. “Roughly right” is no longer a safe margin of error; it is a risk in its own right.
Our experienced MX Europe Commercial Combined team can assist in queries regarding rebuilding costs, we are also able to offer solutions for protected buildings. Get in touch with Andrew Rayner, Property Underwriting Manager, to find out more.
Sources
- Central Bank of Ireland: How can I avoid being under-insured on my home | Central Bank of Ireland
