Why getting your insurance information wrong could cost far more than you think

Hopefully following our previous articles we hope more businesses are aware of the dangers of underinsurance: Insure a building for less than its true rebuilding cost and, if the policy contains an Average Clause, an insurer may proportionately reduce a claim.

That can be painful.

But for a business, underinsurance may not be the biggest insurance risk to worry about.

Providing insurers with incorrect or incomplete information about your business can potentially have much wider consequences. Under the Insurance Act 2015, a failure to make a fair presentation of the risk can, depending on the circumstances, result in a claim being reduced, different policy terms being applied retrospectively or, in the most serious cases, the insurance policy being treated as though it had never existed.

And that problem isn’t restricted to property claims. It could potentially affect a liability claim running into millions of pounds.

Underinsurance and Average – the problem most businesses should already recognise

Let’s start with traditional underinsurance. Imagine a commercial building has a correct rebuilding sum insured of £1,000,000, but has only been insured for £500,000.

The property is therefore only insured for 50% of the amount it should have been.

Where the policy contains an applicable Average Clause, this can result in the insurer reducing a claim proportionately. So even if the loss itself is well within the £500,000 sum insured, the business could still have to fund a significant proportion of the loss itself. This is why establishing accurate rebuilding costs, stock values, machinery values and Business Interruption figures is so important.

But there is another issue which businesses sometimes overlook.

The Insurance Act 2015 – the Duty of Fair Presentation

For UK non-consumer insurance contracts, the Insurance Act 2015 places a duty on the insured to make a fair presentation of the risk before entering into an insurance contract.

In simple terms, a business must disclose every material circumstance it knows or ought to know or, failing that, provide sufficient information to put a prudent insurer on notice that it needs to ask further questions. Material representations of fact must also be substantially correct, while representations of expectation or belief must be made in good faith.

This is far wider than just the value of your buildings.

Depending upon the type of business and insurance involved, insurers may rely upon information such as:

• turnover
• employee numbers and wages
• the nature of work undertaken
• work at hazardous locations
• maximum heights and depths worked
• use of heat
• overseas activities
• products manufactured or supplied
• imports and exports
• claims history
• security and fire protection
• subcontractor payments and
• changes in the activities of the business.

Getting material information wrong can therefore create a problem that extends considerably further than conventional underinsurance.

What can an insurer do if information is wrong?

This is where the Insurance Act 2015 becomes particularly important.

An insurer does not automatically acquire a remedy simply because something was incorrect. It must establish a qualifying breach of the duty of fair presentation and show that, had a fair presentation been made, it would either not have written the insurance at all or would only have done so on different terms.

The available remedy then depends upon the circumstances.

1. The insurer would never have accepted the risk

If a qualifying breach was neither deliberate nor reckless, but the insurer can demonstrate that it would not have insured the business at all had it known the true facts, it may avoid the policy and refuse the claim.

In those circumstances, however, the insurer must return the premium.

2. The insurer would have imposed different terms

Perhaps the insurer would still have provided cover, but would have imposed a higher excess, an exclusion, a warranty or some other different policy term.

The Insurance Act allows the insurer, in appropriate circumstances, to treat the policy as though those different terms had applied from the outset.

That could have a significant effect on a claim.

3. The insurer would have charged more premium

This is one of the areas businesses particularly need to understand.

If the insurer would still have accepted the risk but would have charged a higher premium, the Insurance Act allows it to reduce the amount payable on a claim proportionately.

Importantly, the calculation is based upon the premium actually charged compared with the premium the insurer would have charged had it received a fair presentation of the risk.

For example:

Premium actually charged: £5,000

Premium that should have been charged: £10,000

The insurer may potentially pay only 50% of the claim.

On a £100,000 claim, that could mean a reduced payment of £50,000.

But what if the claim isn’t £100,000?

What if it is £2 million?

That is where the consequences can become extremely serious.

The £500,000 wages problem

Consider a business arranging Employers’ Liability and Public Liability insurance which are often based on estimated annual wages.

It declares estimated annual wages of: £500,000

But the true figure that should have been disclosed was: £1,000,000

It would be wrong to assume that this automatically means every claim can simply be reduced by 50%.

That isn’t how the statutory remedy works.

The important question is what the insurer would have done had the correct £1 million wage figure been disclosed.

If the insurer can establish that the incorrect declaration amounted to a qualifying breach of the duty of fair presentation and that it would have charged a higher premium, the proportionate remedy is calculated by comparing the premium actually charged with the premium that should have been charged.

Suppose the insurer charged £10,000, but can demonstrate that the correct information would have resulted in a premium of £15,000.

The insurer could potentially reduce the amount payable on a claim to: £10,000 ÷ £15,000 = 66.67%

Now consider the consequences of a serious liability claim.

If the amount otherwise payable were £3 million, a 66.67% settlement would be approximately £2 million.

That potentially leaves a £1 million shortfall.

Suddenly, traditional property underinsurance may not look like the biggest insurance issue facing the business.

“But the incorrect information had nothing to do with the claim”

This is another important point. The proportionate remedy under the Insurance Act 2015 is based on the qualifying breach and what the insurer would have done had the risk been presented fairly.

The legislation does not generally say that a proportionate reduction for a higher premium can only be applied where the incorrect information actually caused the loss.

This means businesses should not assume that inaccurate information is harmless simply because it appears unrelated to the circumstances of a subsequent claim.

The precise outcome will always depend upon the facts, the policy wording, the information provided to the insurer and the underwriting evidence showing what the insurer would actually have done.

And what if the incorrect information was deliberate or reckless?

This is potentially the most serious position. Where a qualifying breach of the duty of fair presentation is deliberate or reckless, the Insurance Act 2015 permits the insurer to:

• avoid the insurance contract;
• refuse all claims; and
• retain the premiums already paid.

In other words, deliberately providing materially incorrect information in an attempt to obtain cheaper insurance could prove extraordinarily expensive. Saving a relatively small amount of premium at the start of the policy could ultimately place the entire insurance protection of the business at risk.

Underinsurance isn’t just about buildings

When reviewing your commercial insurance, don’t concentrate solely on whether the building sum insured is correct. Ask whether the insurer has been given an accurate picture of the whole business.

• Have turnover and wage estimates been properly calculated?
• Are the business activities accurately described?
• Have new activities been introduced?
• Has the business started working in different industries or locations?
• Are products now being exported overseas?
• Have employee numbers increased significantly?
• Has the business started using subcontractors?
• Have acquisitions, new subsidiaries or changes in ownership been disclosed?

Insurance is based upon information. If that information is materially wrong, the insurance protection you think you have may not necessarily be the insurance protection you receive when a serious claim occurs.

The lesson: accuracy matters

Underinsurance and Average remain major concerns for UK businesses, particularly when insuring commercial buildings, machinery, stock and Business Interruption. But they should not be considered in isolation.

The Duty of Fair Presentation under the Insurance Act 2015 means that accurate disclosure is fundamental to commercial insurance.

A substantially incorrect figure or an undisclosed material circumstance could potentially affect far more than one section of a policy.

For business owners, the message is straightforward: Don’t simply ask, “Have I bought enough insurance?”

Also ask: “Have we given our insurer the right information to make sure that insurance will respond as expected?”

At Munro-Greenhalgh Insurance Brokers, we believe arranging insurance is about far more than obtaining the cheapest quotation. It is about understanding your business, identifying the information insurers need and helping you arrange insurance that is designed to respond when you need it most.

If you are concerned about underinsurance, the accuracy of your business declarations or whether your current insurance properly reflects your activities, speak to us.

Munro-Greenhalgh Insurance Brokers – independent, award-winning insurance advice for businesses across Bury, Greater Manchester, Lancashire and throughout the UK.

As a UK-based insurance broker, we continually emphasise that securing cover is only part of the equation — being adequately covered matters even more. The issue of underinsurance remains a widespread, often hidden threat for small to medium enterprises (SMEs), commercial property owners and landlords alike. With inflation, rising rebuild/repair costs and business model shifts all playing a role, the exposure is greater than ever.

What the latest data shows

Here are recent findings (within the last 12 months) highlighting the scale of the underinsurance challenge in the UK:

• According to a statistics from Rebuildcostassessment an estimated 70% of UK buildings remain underinsured and on average are only covered for about 67% of their true rebuild cost. Regional data is available here: – https://www.rebuildcostassessment.com/
• The market for SMEs also shows worrying numbers: an estimated up to 80% of UK small businesses may be underinsured. Insurance Business
• One study found that prior to reassessment, buildings were underinsured by an average of 73% (equivalent to a shortfall of circa £382,000) in the valuations reviewed. connect.avivab2b.co.uk
• A recent survey of brokers by Aviva revealed that approx. 73% of brokers believe their clients are underinsured, and only 24% reported that clients had increased their sums insured to keep pace with inflation. Insurance Business

These figures collectively show that while the message is well-known, the practical gap in adequate cover remains large.

Why the gap persists

Several factors combine to keep underinsurance a significant risk:

• Inflation and cost escalation: Costs for materials, labour and supply chains remain elevated, often out-pacing the sums insured on policies. For example, material cost increases were cited by many claims managers as a major driver.
• Outdated valuations: Many policy-holders, especially in property occupier/owner roles, have sums insured based on historic values rather than current reinstatement cost estimates. Without an up to date fresh valuation the gap widens.
• Policy assumptions and complacency: Some businesses assume insurance policies will automatically ‘scale’ with their asset growth or cost inflation — but this is rarely the case.
• Condition of Average / proportional settlement risk: When a sum insured is significantly lower than true value, insurers may apply a proportionate reduction when settling claims — meaning the shortfall falls on the insured.
• Focus on premium cost over cover adequacy: As one study noted, cost is often the main factor for clients — leading to undersized cover limits.

What this means for your business

For business owners, property occupiers or landlords, here are the key implications:

• If you have insurance, don’t assume you are adequately insured. The risk of an uncovered shortfall is real — especially when valuations haven’t kept pace.
• A major event (fire, flood, equipment failure, business interruption) may trigger a claim whose costs exceed your cover, leaving you exposed to large out-of-pocket costs.
• The softening of some insurance market conditions (in terms of pricing) may create a window of opportunity to review cover while capacity and terms remain favourable.
• Now is the time to act – updating your sums insured, reviewing exposures, and working with a broker to ensure cover reflects current cost, not historic cost.

Practical steps to mitigate underinsurance

Here’s a checklist we recommend:

1. Commission a Reinstatement Cost Estimate (RCE) for your buildings — and review plant, machinery, contents and business interruption exposures.
2. Review your sums insured at least annually, especially after refurbishments, growth in operations, equipment investment or any significant change.
3. Ensure your broker/policy wording addresses your business model — including business interruption period adequacy, contents replacement, asset growth and inflation indexing.
4. Consider index-linking or appropriate inflation protection in your policy to keep pace with cost rises.
5. Educate decision-makers in your business: Underinsurance is often a silent risk until a claim occurs. Proactive planning matters.

How we help

At Munro-Greenhalgh, we specialise in working with UK SMEs, commercial property occupiers and landlords. Our role is to:

• Help you benchmark exposures and valuations against industry norms
• Work with you to ensure your sums insured reflect realistic rebuild/replacement costs
• Explain clearly the implications of underinsurance (with case studies where possible)
• Partner across multiple insurers to secure not just cover, but adequate cover at competitive terms

Final thoughts

Underinsurance isn’t merely an “insurance issue” – it’s a business-continuity issue. Having cover isn’t sufficient if the sums insured are significantly short of the true cost of a loss. In today’s environment of heightened cost inflation, supply-chain fragility and evolving risk landscapes, ensuring your cover is accurate and current is essential.

If you haven’t reviewed your cover and sums insured in the past 12 months, now is the right time. Contact us for a no-obligation review — protecting your business today means peace of mind tomorrow.