The Federation of Master Builders

Beware the risks of underinsuring

Published date: 03 May 2023

Reducing your business insurance cover to save money in the short term can lead to bigger financial issues. FMB Insurance explains why.

The UK economic climate has been difficult to navigate in recent years and many construction businesses are still facing challenges such as rising energy costs, increasing inflation, fluctuating material costs, disrupted supply chains and the impacts of Brexit.

At times like these, it makes sense that businesses look to save money where they can. But while you may be tempted to scale back your insurance cover, this can lead to an increased risk of being underinsured.


What is underinsurance?
Simply put, underinsuring your business means you have inadequate cover for your business needs.

As an example, the British Insurance Brokers’ Association found that its construction industry clients who had tradesperson insurance had opted to remove a section of their cover or reduce the limits of their cover such as maximum contract value or number of employees covered. It’s a risky move and, unfortunately, quite a common practice. Aviva estimates in its Risk Insights Report 2023 that 50% of UK businesses are underinsured.


What are the risks of underinsurance?
Taking out less cover than you need can significantly impact your business in the event you need to make a claim as your claim amount could exceed the value that your insurance provider can settle for – leading to a financial shortfall that you must cover.

In cases of underinsurance, your insurance provider can also apply what is known as the ‘average clause’, which means they can reduce your settlement by the same percentage that your policy and/or asset is underinsured for.

Attempting to reduce your premiums by not accurately reporting sums and details to your insurance provider could also void your entire policy.

So, what might initially appear to be a good tactic to save money in the short term could result in a major financial loss for your business in the long run.


How to avoid underinsurance
The construction industry takes risks every day and is inherently prone to incidents. This is why it is paramount for businesses in the industry to have the right level of cover, for the benefit of the business itself, the construction workers and the general public.

It’s in the hands of insurance brokers across the country to work with businesses to develop an insurance policy that covers all bases and alleviates the heightened risks of being underinsured.

While there may be changes to your business that require adjustments to your level of cover, it’s important to work with your insurance provider to review your business needs, identify gaps in cover, and ensure appropriate valuations for your business.

At FMB Insurance, an experienced team can talk you through the types of cover available and help you determine the correct cover you need for your business. FMB Insurance can approach its panel of insurers to ensure you are not only getting cover tailored to your company but that you can access competitive prices too.


FMB Insurance can manage all of your business protection needs under one roof, delivering the right policies for the right situations. Insurance and warranty products include Contract Works Insurance, New Homes 10 Year Structural Warranty, Public and Employers’ Liability Insurance and more. Call 01353 652 760 or email [email protected]

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