Underinsurance and the Average Clause – Avoiding Reduced Payouts

Underinsurance is one of the most expensive mistakes a landlord can make. If your sum insured is too low, insurers can apply the average clause and reduce any claim in the same proportion that you are underinsured. The reduction can hit every part of the claim – buildings repairs, contents, and sometimes loss of rent – turning a manageable incident into a major capital hit. This article explains how average works, where landlords go wrong, and how to set accurate sums insured so claims pay in full.

What Is Underinsurance?

Underinsurance occurs when the amount you insure (the sum insured) is less than the true value the policy requires. For landlords, this usually means the rebuild cost of the property (not the market value), including professional fees and debris removal, or the replacement cost of landlord contents.

How the Average Clause Reduces Your Claim

Most landlord policies contain an average clause. If you are, say, 25% underinsured, your payout can be cut by 25% on any claim – not just total losses.

Example (buildings):

• True rebuild cost: £300,000
• Sum insured on policy: £225,000 (i.e. 75% of the true figure)
• Escape of water claim value: £40,000
• Average applied: insurer pays 75% of £40,000 = £30,000 (before excess)

That missing £10,000 comes out of your pocket. If the same proportional reduction is applied to loss of rent linked to the buildings sum, your income cover may also be trimmed.

Rebuild Cost vs Market Value – Not the Same Thing

Market value reflects land, location and demand. Insurers need the cost to rebuild the structure to current standards: materials, labour, professional fees (architects, engineers, surveyors), debris removal, plus any code-compliance upgrades (e.g. HMO fire doors, emergency lighting). In London or prime areas, the market value may be far higher than rebuild; in other regions, rebuild can be surprisingly close. Always insure for rebuild, not sale price.

What to Include in a Buildings Sum Insured

• Full rebuild cost of the dwelling to an equivalent specification.
• Professional fees – architects, engineers, surveyors, planning fees.
• Debris removal and site clearance.
• Outbuildings, walls, gates, fences, drives and paths if the policy requires them within the sum insured.
• HMO upgrades – fire doors, alarm systems, emergency lighting where installed.
• VAT if you are not VAT-registered and would have to pay VAT on rebuild works.

Check your policy: some include professional fees and debris removal within the buildings sum insured; others add separate limits. Either way, make sure the overall allowance is adequate.

Contents and Landlord’s Fixtures

For furnished lets, set a realistic landlord contents sum insured covering furniture, appliances, curtains/blinds and floor coverings you own. Avoid relying on a token limit (e.g. £5,000) if you’ve installed quality furnishings. Remember that tenants’ possessions are not covered by your policy.

Loss of Rent – Amount and Duration

Loss of rent is usually limited by time (12, 18 or 24 months) and sometimes by a monetary cap. Two frequent problems:

• Too short a period – complex reinstatement (fires, subsidence, listed buildings) can exceed 12 months. Consider 18–24 months.
• Linked to buildings underinsurance – if your policy measures loss of rent as a percentage of the buildings sum or applies average across sections, underinsurance can reduce income cover too.

Day One Reinstatement and Declaration-Linked Cover

Two features that help protect against underinsurance:

• Day One Reinstatement – you declare today’s rebuild value (the declared value), and the policy adds an automatic uplift (often 15–50%) to absorb cost inflation between policy start and a potential claim. You must still get the declared value right.
• Declaration-linked (adjustable) policies – common on portfolios; you declare values annually and the insurer applies an uplift and/or adjustment at year end. Again, the starting figures must be sound.

Index linking helps mid-term, but it does not fix an initially wrong declared value. Garbage in, garbage out.

How Landlords Commonly Underinsure

• Using the purchase price or mortgage valuation instead of rebuild cost.
• Forgetting professional fees and debris removal.
• Ignoring extensions, loft conversions and HMO upgrades completed since the last review.
• Not including outbuildings, boundary walls and hard landscaping where required.
• Setting a 12-month loss-of-rent limit for properties that would realistically take longer to reinstate.
• Assuming the freeholder’s block policy makes you safe when you still have landlord contents and loss of rent exposures within your demised areas.

Leasehold and Blocks – Who Insures What?

In flats, the freeholder (or RMC) often insures the building. You still need cover for landlord contents, loss of rent (if your lease allows you to insure it), and liability. Ask for a copy of the block policy and check sums insured, perils (including escape of water) and excesses. If the block is underinsured, you carry indirect risk through delays and shortfalls.

Waiver of Average – Rare but Valuable

Some specialist insurers offer a waiver of average or a limited tolerance (e.g. no average if within 10–15% of the correct value). It’s not universal and usually comes with conditions (professional valuation, Day One wording). If available, it provides a safety net but is not an excuse to lowball sums insured.

Worked Example – Getting the Number Right

Two-storey semi, extended kitchen, HMO upgrades (fire doors/alarms).

• Base rebuild estimate (current rates): £240,000
• Professional fees (10%): £24,000
• Debris removal/site clearance (7%): £16,800
• Outbuildings/boundaries/hardstanding: £9,200
• Total declared value: £290,000
• Day One uplift (25%): policy limit effectively ~£362,500

If you had insured at £220,000 “to save premium”, you’d be ~24% light at inception, and average would bite on every claim.

Practical Checklist to Avoid Underinsurance

• Get a rebuild assessment – commission a professional valuation or use a recognised calculator and sanity-check unusual features (listed status, basements, high-spec kitchens).
• Add fees and debris removal – ensure your allowance matches your policy structure.
• Include VAT if you are not VAT-registered.
• Review after works – extensions, lofts, conversions and compliance upgrades all increase rebuild cost.
• Use Day One with an appropriate uplift (often 25–35% on portfolios).
• Right-size loss of rent – set both monthly amount (your actual rent) and duration (consider 18–24 months for complex risks).
• Portfolio housekeeping – maintain a property schedule listing declared values, contents limits, loss-of-rent months, excesses and special features.
• Ask about waiver of average – if your insurer offers it, understand the conditions (e.g. professional valuation within 3 years).

Final Thoughts

Average is not a technicality; it’s a powerful clause that can strip thousands from a valid claim. The cure is straightforward: set accurate sums insured, use Day One where appropriate, and review values after any works. Treat these steps as part of your risk management, just like inspections and certificates. When a claim happens, you want the policy to pay in full – not 75%.

Request your quote or call-back

The most efficient way to get a personal quote with the best price and cover possible is to call the team on 01832 770965 so we can focus on your enquiry when you are ready and sitting down with your portfolio details to hand.

Alternatively, you can use the form below to request one of our team to give you a call back.

Publication date: Tuesday 6 January 2026

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