It is one of the most widespread problems in UK property insurance, and one of the least discussed. Industry estimates consistently suggest that around 76 per cent of UK properties are insured for less than they would actually cost to rebuild — a gap that has widened significantly over the past three or four years as construction costs have risen sharply and as many property owners have continued to renew their insurance without reviewing the underlying figures. If your buildings  insurance sum insured was set two or three years ago and has not been reviewed since, there is a reasonable chance you are underinsured. This article explains what underinsurance means in practice, how the average clause works, why the problem has become more acute in 2025 and 2026, and what property owners,

landlords and block managers should do about it.

What is underinsurance and why does it matter?

Underinsurance occurs when the sum insured on a buildings policy — the figure against which any claim will be assessed — is lower than the actual cost of  rebuilding the property to its original specification. It is important to understand that the sum insured should reflect the reinstatement cost of the building, not its market value, not the price you paid for it and not what a mortgage lender valued it at. Reinstatement cost is the full cost of demolishing any remaining structure after a loss, clearing the site, and rebuilding the property from the ground up using current materials, labour rates and professional fees. In many parts of the

country, this figure is quite different from market value. A Victorian terrace in Brighton might sell for £500,000 but cost £650,000 to rebuild from scratch. A listed building might cost even more to reinstate, given the specialist materials and tradespeople required. When the sum insured falls below the true reinstatement cost, the insurer is entitled to apply what is known as the average clause to any claim made under the policy. Understanding the average clause is essential for any property owner.

How the average clause works — and why it is more damaging than most people realise

The average clause does not just affect total loss claims. It applies to every claim made under a policy where the property is underinsured — including partial claims for relatively modest losses. Here is how it works in practice. Suppose your property has a true reinstatement cost of £800,000 but is insured for

£500,000 — 62.5 per cent of the correct figure. If you make a claim for £80,000 following a fire in the kitchen, the insurer will apply the average clause and pay only 62.5 per cent of that claim: £50,000. You absorb the remaining £30,000 as an uninsured loss. For larger claims, the gap is proportionally larger. A £300,000 claim on the same property would result in a settlement of £187,500, leaving you £112,500 out of pocket. This is not a worst-case scenario. It is the standard contractual position under most UK buildings insurance policies. The insurer is not acting improperly by applying average — they are doing precisely what the policy terms permit. The responsibility for setting an accurate sum insured rests with the policyholder, and a broker who reviews that figure properly at each renewal.

“The average clause applies to partial claims as well as total losses. A property insured at 60% of its true rebuild cost will receive only 60% of every claim made — regardless of the size of the loss.”

Why rebuild costs have risen so sharply since 2022

The underinsurance problem has become considerably more acute in the past three years for reasons that are well documented. UK construction costs have been driven upward by a combination of factors: post-pandemic supply chain disruption, labour shortages across the trades, significant inflation in the cost of materials including structural timber, concrete, insulation and roofing materials, and increases in the professional fees associated with design, project management and building control. According to data from the Royal Institution of Chartered Surveyors, UK rebuild costs rose by more than 15 per cent between 2022 and 2025. For a property whose sum insured was last reviewed in 2021 or 2022 and has simply been indexed upward by the policy’s standard annual inflation adjustment — which is typically set at a flat percentage rather than a figure that tracks actual construction cost inflation — the gap between the insured value and the true

rebuild cost may be material. This is not a problem confined to older or lower-value properties. It affects residential blocks, commercial premises, portfolio landlord properties and high-value homes equally. Any property whose reinstatement value has not been properly assessed in the past two to three years is at risk.

The particular risk for blocks of flats

Underinsurance is a sector-wide problem, but it is particularly acute for residential blocks. Blocks of flats typically have higher reinstatement costs relative to their market value than standard residential properties, especially where the block is older, uses non-standard construction, includes communal facilities such as lifts, plant rooms or concierge areas, or is located where labour costs are elevated.

The Building Safety Act 2022 has added a further layer of complexity. Blocks that have undergone fire safety remediation works — cladding replacement, fire suppression installation, structural assessment and remediation — have seen their reinstatement cost increase as a result. Any block that has had significant building works carried out in the past three years should have its sum insured reviewed as a matter of priority. RTM company directors and managing agents have a duty to leaseholders to ensure the building is properly insured, and an out-of-date reinstatement value is a breach of that duty.

The EPC effect: an underinsurance risk most landlords have not considered

A further and less widely understood driver of underinsurance in 2025 and 2026 is the impact of energy efficiency improvement works on rebuild costs. Many landlords have invested in heat pump installations, improved insulation, double glazing upgrades and other energy efficiency measures across their portfolios in response to evolving EPC requirements. Each of these improvements increases the reinstatement cost of the property. If you have spent £15,000 on energy efficiency upgrades to a rental property and the sum insured on your landlord policy has not been updated to reflect that investment, you are underinsured by that amount from the moment the works are complete. Multiply that across a portfolio of ten or fifteen properties and the aggregate underinsurance

figure becomes significant.

What you should do

The most important step any property owner can take is to have their reinstatement values reviewed by a specialist broker, or for complex or high-value properties, by a specialist reinstatement cost assessor. For most investment properties, a broker-led review using current BCIS (Building Cost Information Service) data will identify whether the existing sum insured is adequate and by how much it needs to be increased if not. Haxon recommends that all clients have reinstatement values reviewed at each renewal as a matter of course, and more frequently where the property has been subject to significant works, where the asset has particular construction characteristics, or where the sum insured has not been professionally assessed in the past two to three years. It is one of the simplest and most important steps a property owner can take.

Frequently asked questions

How do I find out the correct reinstatement value for my property?

For most standard residential properties, the BCIS rebuild cost calculator provides a good starting point. For blocks of flats, commercial properties, listed buildings or any property with non-standard construction, a formal Reinstatement Cost Assessment carried out by a chartered surveyor is the most reliable approach. Haxon can guide you through this process and will highlight any concerns about your current sum insured as part of a policy review.

Does my insurer’s annual inflation adjustment protect me from underinsurance?

The standard annual inflation adjustment applied by most insurers is a flat percentage — often around three to five per cent. In years where construction cost inflation has been running at twelve to fifteen per cent, a flat adjustment of this size does not keep pace with the actual movement in rebuild costs. It reduces the rate at which underinsurance accumulates, but it does not eliminate the risk. A proper review of the reinstatement value is the only reliable protection.

What is the difference between market value and rebuild cost?

Market value is what your property would sell for on the open market. Rebuild cost — also called reinstatement cost — is what it would cost to demolish what remains after a loss and rebuild the property from the ground up. These figures can be very different. In many parts of the country, rebuild cost exceeds market value for older properties. In prime locations, market value may significantly exceed rebuild cost. For insurance purposes, only the rebuild cost is relevant.

Can I be penalised for underinsurance even on a small claim?

Yes. The average clause applies to claims of any size. A £10,000 claim for escape of water on a property that is thirty per cent underinsured will result in a settlement of £7,000. The shortfall is your uninsured loss, regardless of how straightforward the claim otherwise is.



Haxon reviews reinstatement values as part of every annual renewal for our property and landlord clients. If you have not had a rebuild cost review recently,

we would welcome the conversation.