Top Risks of Underinsurance for Managing Agents.

1. Proportional Settlement Under the Average Clause.

Most commercial building insurance policies include an average clause, which means that if a property is underinsured, the insurer will reduce any claim payout in proportion to the shortfall. If a block has a true reinstatement value of £4 million but is insured for £2.8 million, it is 30% underinsured. A £600,000 claim would be settled at just £420,000. The remaining £180,000 falls on the freeholder and, ultimately, the leaseholders.

2. Personal Liability for Managing Agents.

ARMA guidance and general professional duty of care obligations place a responsibility on managing agents to ensure that block insurance is adequate. Where a managing agent has been on notice that a valuation is outdated, or has simply allowed years to pass without recommending a reassessment, they may face claims from leaseholders following an underinsured loss. This is an increasingly litigated area.

3. Insurer Challenges at Renewal.

Insurers are becoming more rigorous at renewal, particularly on blocks where the declared sum insured has not been supported by a professional assessment within the last three years. Queries, referrals, and potential policy voidance are real risks where no RICS-regulated assessment can be produced on request.

4. The Hidden Compounding Problem.

Post-2020 construction cost inflation, driven by material shortages, labour cost increases, and supply chain disruption, has been significantly higher than general CPI. Many blocks that appeared adequately insured in 2019 are now materially underinsured, even if annual index linking has been applied. The index simply has not kept pace with actual rebuild cost increases for many property types.

Studies from BCIS and the ABI have indicated that average underinsurance across UK blocks runs at between 20% and 40% of true reinstatement value. On a £5 million block, that is a £1 million to £2 million exposure that leaseholders and managing agents may be unaware of.

How to Mitigate the Risk.

• Commission a RICS-regulated reinstatement cost assessment at least every three years.
• Trigger an earlier assessment after any significant works, change of use, or construction cost spike.
• Document your recommendation to clients in writing at each renewal.
• Use a firm that provides BCIS-indexed assessments accepted by all major insurers.