Construction projects are inherently complex, involving multiple stakeholders, significant capital investment, and a wide array of risks. From weather disruptions and material shortages to workplace injuries and design flaws, the potential for unexpected events is high. Insurance exists to cushion these blows, but when cover is insufficient, the consequences can be devastating. Underinsurance in construction projects doesn’t just reduce financial protection; it can derail entire ventures.
What is underinsurance?
Underinsurance occurs when the value of insurance cover is less than the actual replacement or repair costs of the insured assets, liabilities, or potential losses. In construction, this may involve:
- Inadequate property cover on equipment or partially completed structures.
- Insufficient Indemnity insurance for workplace accidents or third-party claims.
How can underinsurance be avoided?
Underinsurance can arise from deliberate cost-cutting, but it can also stem from outdated valuations, incomplete risk assessments, or a misplaced belief that “it won’t happen to us.”
As with most things, the devil is in the detail. Contracts should be reviewed carefully to ensure adequate protection, including appropriate Professional Indemnity insurance and coverage for contractual obligations such as JCT 6.5.1 (non-negligence damage cover), contract frustration, and delays in project start-up.
The hidden risks behind lower premiums
Lower premiums may seem attractive in the short term, but they can conceal dangerous exposure. In construction projects, risks are interconnected: a small uninsured event can snowball into large financial losses.
Some common hidden risks include:
- Financial exposure far exceeds savings
Any premium saved by choosing less cover is nothing in comparison to a major uninsured loss. For example, underestimating equipment replacement costs could leave a contractor unable to finish a project if critical machinery is destroyed.
- The average clause penalty
Many insurance policies include an average clause, meaning any underinsurance will cause all claims to be reduced in proportion to the shortfall. For example, if a construction plant is insured for £75,000 but the actual replacement value is £100,000, it is underinsured by 25%. If £50,000 worth of plant is stolen, the payout would be reduced by 25% (the underinsurance amount) to £37,500 leaving the business £12,500 out of pocket. This surprises many policyholders who assume that smaller claims will be covered in full, even if their total cover is inadequate.
- Project delays and liquidated damages
Underinsurance on delay-in-start up or business interruption cover can trigger contractual penalties. If a fire or flood halts work and the insurance payout is insufficient to maintain cash flow, the project may miss delivery milestones, incurring liquidated damages and reputational harm.
- Legal and contractual breaches
Many construction contracts specify minimum insurance requirements. Failure to meet these can lead to breaches of contract, disputes, and even termination of agreements.
Real-world implications
- Contractors may be forced to self-fund repairs or face bankruptcy if they cannot absorb uninsured costs.
- Developers risk unfinished projects, reduced financing options, or foreclosure if lenders find cover to be inadequate.
- Clients and end-users experience delays, cost overruns, and reduced confidence in the project team.
The ripple effect often extends beyond the immediate financial loss - damaging trust among stakeholders, jeopardising future bids, and increasing scrutiny from regulators and insurers.
Why underinsurance happens
- Rapid cost inflation: Material and labor prices change quickly; outdated valuations leave cover limits behind.
- Misunderstood policy terms: Complex clauses and exclusions can lead to mistaken assumptions about what is covered.
- Pressure to cut costs: Budget constraints sometimes push decision-makers toward cheaper premiums rather than adequate protection.
- Failure to update cover during project changes: Variations and scope increases can raise insured values mid-project without a corresponding policy adjustment.
Mitigating the risk of underinsurance
- Conduct regular valuations: Ensure sums insured reflect current replacement costs and project changes.
- Review contracts carefully: Align insurance with contractual obligations to avoid breaches and disputes.
- Use scenario planning: Stress-test insurance limits against worst-case events, including total loss and extended delays.
- Maintain clear documentation: Accurate records of materials, labour, and design updates help justify claims and adjustments.
- Engage with specialist brokers: Our Construction team can identify cover gaps and negotiate appropriate terms to keep you and your business protected.
The true cost is more than money
Underinsurance erodes more than balance sheets. It undermines confidence among clients, lenders, and joint-venture partners. It puts careers at risk when project leaders are held accountable for failures to protect investments, and, in the most severe cases, it can collapse entire businesses.
Insurance is not simply a regulatory checkbox or a line item to trim; it is a fundamental safeguard of the construction industry’s viability. In an environment where margins are tight and risks are high, ensuring you are fully covered is not just prudent; it is essential.
We can help
Our specialist Construction team are on hand to provide tailored advice to suit your business needs. Contact us today to discuss how we can protect your company from risk.