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- What underinsurance actually means.
- The “average clause” — the bit that really bites.
- A real example: what it looks like when it goes wrong.
- Why animal businesses are particularly exposed.
- What the Financial Ombudsman says.
- Practical steps to close the gap.
- The bottom line
What underinsurance actually means.
In plain terms, underinsurance is when the amount you’re insured for — your “sum insured” — isn’t enough to cover the real cost of rebuilding, repairing or replacing what you’ve lost. It sounds like a small technicality. In practice, it can make a significant difference to how much you’re left to pay yourself if you need to claim – on top of everything you’ve already been through.
It happens for some very ordinary reasons:
- The sum insured was based on a rough guess, a mortgage valuation, or what a building might sell for — not what it would actually cost to rebuild.
- Building material and labour costs have gone up since the policy was last reviewed, but the figure on the schedule hasn’t moved.
- A building has been extended or improved, but the change was never reported.
- Equipment, stock or livestock values have grown over the years without the cover growing with them.
- The business itself has changed shape — more animals, more staff, a second site, a new van — and the policy is still written for the business as it was.
None of this tends to be deliberate. It’s simply that insurance is one of those jobs that’s easy to defer when there’s always something more urgent to deal with.
The “average clause” — the bit that really bites.
Here’s the part that catches people out. Many property and business policies include something called the average clause (sometimes called “condition of average”). It sounds dry, but it has a very real effect on what you get paid.
Where an average clause applies, and your sum insured is lower than the true rebuild or replacement cost, the amount paid for a claim may be reduced to reflect the level of underinsurance.
Say a building would genuinely cost £400,000 to rebuild, but it’s only insured for £200,000. That’s 50% underinsured. If a storm then causes £50,000 of damage, the insurer doesn’t pay £50,000. If the average clause applies, they may pay 50% of it — £25,000, minus the excess — and the rest comes out of your own pocket.
It’s a mechanism designed to be fair to everyone paying premiums, since it stops people insuring low to save money and hoping they never need to claim in full. But if you didn’t know it was there, or didn’t realise how far off your sum insured had drifted, it can come as a nasty surprise when you need your insurance most.
A real example: what it looks like when it goes wrong.
One case that shows this in real-life involved a smallholding after a storm. High winds caused excessive damage to a livestock building. By the time the builder had assessed it, the structure was considered a total loss.
That’s a difficult day for any business owner. It got harder once the numbers were checked. The sum insured on the building represented just 18.45% of its true rebuild value — meaning the property was drastically underinsured. Because the policy included an average clause, the clause was applied to the claim.
The reserve on the file was originally set at over £20,000. When the claim was finally settled, the payout came to a little over £6,000 — nowhere near enough to put the building back. This is an example of how an average clause can significantly reduce a claim settlement when a property is substantially underinsured.
It’s a stark illustration of why the sum insured matters just as much as having a policy at all. A “yes” on your renewal paperwork can leave you very short if the figure behind it was never right in the first place.
The same client had, in fact, been meaning to increase the buildings’ cover for a while — from just over £100,000 to £600,000 — but other things kept getting in the way, as they so often do when you’re running a business. Once the claim brought the shortfall to light, that overdue review finally happened at the next renewal, bringing the sum insured up to a realistic level for the first time in years. It’s the kind of update that’s far better made proactively than in the aftermath of a claim.
Why animal businesses are particularly exposed.
Underinsurance isn’t unique to any one type of business, but a few things make animal-related businesses more vulnerable to it than most:
- Buildings that are hard to value simply. Stables, barns, kennels, livestock sheds and lean-tos are often older, purpose-built or altered over time, which makes online calculators and guesswork particularly unreliable.
- Seasonal and fluctuating stock. Pet shops, groomers and boarding businesses can hold very different stock or equipment levels depending on the time of year — cover needs to reflect the peak, not the average.
- Growing equipment lists. Grooming vans, hydrotherapy equipment, clipping kit, horseboxes and mobile units tend to be replaced and upgraded gradually, and each upgrade is easy to forget to declare.
- Livestock and animal values that move. The value of livestock, and specialist or pedigree animals, can shift considerably from year to year.
- Businesses that grow quietly. A dog-walking business that started with three regulars, or a boarding business that’s added kennels one at a time, can end up a very different size to the one described on the original policy.
If any of that sounds familiar, it’s worth taking ten minutes to check whether your figures still reflect reality — not what they were when you first took the policy out.
What the Financial Ombudsman says.
It’s not just insurers who take underinsurance seriously — it’s also a recognised source of complaints. The Financial Ombudsman Service regularly looks at cases where people feel they’ve been treated unfairly, and a consistent theme runs through its guidance: insurers need to ask clear questions to help customers establish the right level of cover – not vague ones that leave room for customers to guess.
That’s exactly why we ask as many questions as we do. We know it can feel like a lot, but every question helps us get a true picture of your business, so the figure you’re covered for matches what you’d need if the worst happened. Getting the details right from the start gives you greater confidence that your cover reflects your business if you need to claim.
It’s also why auto-renewing without a proper check is worth avoiding. Your business rarely stays exactly the same year to year, and a policy that isn’t reviewed can quietly drift out of step with it. Taking a few minutes at renewal to check the details isn’t just good practice — it’s one of the simplest ways to help you understand whether your current sums insured still reflect your business.
Practical steps to close the gap.
| Practical step | Details |
|---|---|
| Base your sum insured on rebuild cost, not market value. | What your buildings would sell for and what it would cost to rebuild them from scratch after a total loss are often very different figures. |
| Get a proper valuation for anything unusual. | Traditional barns, converted outbuildings or non-standard construction are exactly the kind of properties that are easy to undervalue informally. For more conventional buildings, the Building Cost Information Service (BCIS) calculator is a free, independent tool for estimating rebuild costs; for older, listed or non-standard buildings, a chartered surveyor is a better bet. |
| List your equipment and stock properly, and revisit it. | A written inventory, updated annually, catches the new van, the extra kennels, or the equipment you bought last spring. |
| Review at renewal, every single time. | Costs move even when your business doesn’t. An annual check takes far less time than an underinsurance claim does — and paying for an appropriate level of cover may cost more, but it could reduce the risk of a significant shortfall if you need to claim. |
| Tell your insurer when things change. | New buildings, extensions, more animals, more stock, more staff — all of it should be reflected in your policy, not left for the next renewal. |
| Ask directly about the average clause. | Find out whether it applies to your policy, and if so, on which parts of your cover. |
The bottom line
Underinsurance isn’t always obvious. Your business can change gradually, while the figures on your policy stay the same. For animal businesses in particular — with their mix of ageing buildings, seasonal stock and growing equipment lists — a policy that was right five years ago may no longer reflect the business you have today.
The fix isn’t complicated. It just takes a proper look at the figures, ideally before renewal rather than after a storm. If it’s been a while since anyone checked yours, it might be worth doing that this week.
If you’d like a second opinion on your sums insured, or simply aren’t sure whether your current policy reflects your business as it stands today, get in touch with us. We’re happy to talk through your cover, explain how the average clause applies to your policy, and help you understand whether your current cover still reflects your business — before you need to make a claim.
You can reach us on 0345 982 5499 or by email at [email protected].
*This guide is general information, not financial advice. If you’re at all unsure how your cover stacks up, the right next step is a conversation with your broker or insurer.