Commercial landlords are being urged to scrutinise the fine print of their leases amid growing concern that hidden coverage gaps and inaccurate rebuild valuations could leave properties significantly underinsured.
New guidance from RebuildCostASSESSMENT.com warned that many landlords focus on securing commercial landlord insurance without fully understanding how lease wording affects who arranges cover, who pays for it, and what happens when a property suffers major damage.
The warning comes amid a backdrop of deepening underinsurance across the UK commercial property sector. According to data drawn from more than 43,000 property assessments, only 7% of UK properties are insured accurately, with 70% underinsured and 23% overinsured. Separate research compounds the picture, with a 2025 Charterfields study finding that 88% of commercial sites surveyed were underinsured on building values.
RebuildCOSTASSESSMENT.com drew particular attention to the complexity introduced by different lease structures.
The Full Repairing and Insuring (FRI) lease is the most common type of commercial property lease in the UK, placing full responsibility on the tenant for both internal and external repairs and insurance. It is regarded as institutionally acceptable and will often be the starting point for commercial lease negotiations.
The picture becomes more complicated in multi-let buildings and mixed-use developments.
In such arrangements, tenants are responsible for the parts demised to them, while landlords are obliged to repair the rest, including external landscaping, structural parts of the building, parking areas and security systems, with costs typically recovered through the service charge. These divisions can create confusion around claims and reinstatement obligations that may only surface when a loss occurs.
The most critical issue flagged by RebuildCostASSESSMENT.com is the continued use of market value, purchase price or outdated estimates as the basis for insurance figures.
According to the report, many clients still insure buildings based on market value rather than rebuild cost, despite the two being fundamentally different. Rebuild costs must account for labour, materials, professional fees, debris removal and compliance with current building regulations, all of which have shifted materially since 2020.
Getting those figures wrong triggers the average clause, which reduces claim payouts proportionally. On average, underinsured properties are currently covered for just 67% of their true rebuild cost, up from 63% in 2024. Construction material costs rose by roughly 40% between 2021 and 2025, meaning many older policies no longer reflect the actual cost of a full rebuild.
"Many landlords assume that once an insurance policy is in place, they are protected, but the reality is that the lease and the rebuild value are just as important," said a spokesperson for RebuildCOSTASSESSMENT.com. "You can have a policy in place and still be exposed if responsibilities are unclear or the sum insured does not reflect the actual cost of reinstatement."
Independent legal specialists share the concern. Alex Rosenfield, Partner at Fenchurch Law, which acts exclusively for policyholders in complex insurance disputes, has warned that the consequences of underinsurance extend well beyond a reduced claim settlement.
"Underinsurance can be disastrous with large claims, but even partial losses can still leave policyholders under-compensated," he said
Regulatory expectations on brokers are also tightening. Under the FCA's Consumer Duty regime, insurers and intermediaries are expected to deliver fair outcomes for customers, which includes ensuring that cover limits are fit for purpose. Some insurers are already placing greater emphasis on the evidence behind declared sums insured, wanting to see figures grounded in clear factual assessment rather than round numbers or simple indexation uplifts.
Evolving compliance requirements are pushing reinstatement costs higher still. The Building Safety Act, together with evolving fire safety and energy efficiency standards, can materially increase the cost of rebuilding after a major loss. Minimum Energy Performance Certificate requirements under the Minimum Energy Efficiency Standards regime mean landlords must meet minimum EPC standards, often requiring upgrades that add to rebuild costs and are easily overlooked when setting sums insured.
UK property insurance claims are expected to reach £6.1 billion in 2025, the highest annual payout on record, with weather-related claims alone estimated at £1.6 billion. For brokers advising commercial landlords, ensuring that sums insured are grounded in current, professionally assessed rebuild data is rapidly becoming a conduct expectation as much as a commercial one.
