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A business owner's guide to commercial rebuild cost and sums insured

Underinsuring commercial property can have serious financial consequences, particularly if you need to make a large claim. But fluctuating material and labour costs can make it hard to calculate your building’s rebuild cost, increasing the risk of underinsurance if you undercalculate the cost to rebuild your property. 

While it’s always the policyholder’s responsibility to set the sum insured, this article explains how you might calculate the correct figure so your commercial property insurance sum insured accurately reflects your property. 

11.11.26

By Ian Sadd

What is a commercial building sum insured? 

The sum insured is the maximum amount of money your insurer will pay you to rebuild your commercial property after an insured event (such as a fire or flood).  

The amount should be the same as your property’s ‘reinstatement’ value, which is the estimated cost of restoring a building to its original condition. Matching these amounts should ensure the compensation you receive is enough to rebuild the property if it is destroyed.   

Bear in mind that the sum insured is not the same as a property’s market value, its purchase price, or the land value. The sum insured should reflect the cost of rebuilding the property at current prices.  

What must be included in your commercial sum insured calculation? 

The payout should be enough to cover the cost of: 

  • Demolition and site clearance – demolishing any remains and clearing away debris. 

  • Professional fees – covering the cost of hiring surveyors, architects, engineers, and project managers.  

  • Building materials and construction costs – to rebuild the premises completely (if necessary). This should also include any specialist building materials or contractors required for buildings on non-standard construction.  

  • Outbuildings – any external buildings should also be covered by your policy (for example, if a warehouse on the premises was also destroyed). You should also factor in hardstanding areas, walls, gates, fences, car parks, and any infrastructure to provide telecommunication and internet services. 

  • Property location – the location of your property can affect rebuild costs; city centre road closures and difficult access can increase construction costs that need to be factored into your calculation.    

The dangers of commercial underinsurance 

Underinsuring your commercial property doesn’t just mean the sum insured is lower than the true rebuild cost. If your policy includes ‘the average clause ’, it means that any payout you receive can be reduced by the percentage you’re underinsured by.  

For example: 

  • The sum insured for your commercial property is £250,000. 

  • The actual cost to rebuild the property is £500,000 (which means you’re underinsured by 50%).  

  • The building is damaged, and you make a claim for £100,000. 

  • As you’re underinsured by 50%, your insurer can reduce your payout by the same percentage, so you may only receive £50,000. 

Some commercial policies include an 85% average clause value, so if your sum insured is 85% or above of the correct value, the average clause won’t apply. Check your policy wording before you rely on this, though. 

Not all building insurance policies use the average clause (sometimes called the condition of average), but it is relatively common. It’s designed to prevent intentional underinsurance and ensure that premiums accurately reflect the risk.  

You can find out more about the average clause and how it works in our guide to underinsurance.  

How to accurately calculate your commercial rebuild cost 

Underinsuring commercial property is an expensive mistake, but you can avoid this by: 

  • Using a professional valuation service – using a RICS (Royal Institution of Chartered Surveyors) surveyor will take into account the size of the property, the type of building it is, and how complex it might be to rebuild, and provide you with a rebuild cost value. Desktop valuation services are also worth considering for a lower-cost service compared to a full RICS valuation.  

  • Reviewing base construction costs annually – check the sum insured reflects the current cost of materials and labour and remember to factor in any changes or improvements you’ve made to the building. 

  • Focusing on the rebuild cost only – the market or land value of a property isn’t an accurate gauge of rebuild cost, and they can be significantly higher or lower. This can lead to overinsuring (which means you pay a higher-than-needed premium) or underinsuring your property. 

  • Factoring in additional costs for unique features, construction methods and older buildings – listed or historic buildings typically cost more to rebuild, especially if they use unusual materials or construction techniques.  

  • Use an insurance broker – while insurance brokers can’t provide you with the specific rebuild cost for your building, they will be able to sense-check it to ensure it is realistic.  

You can find helpful advice about rebuilding commercial property at RICS (Royal Institution of Chartered Surveyors) and the RICS commercial reinstatement calculator. 

Similarly, if you’re a homeowner, the same principles apply, and you should regularly review your home's rebuild cost. For more information, take a look at our residential property rebuild guide and the Building Cost Information Service (BCIS).   

How commercial property insurance protects your business 

Commercial property insurance is designed for landlords and property owners and covers the cost of rebuilding your premises after an insured event.  

Business owners should consider policies that cover other liabilities under a commercial combined policy, which bundles together several different insurance products. Policies can vary but typically include: 

  • Commercial property insurance – if you lease the building, this may be taken out by the landlord, or you may be responsible for arranging cover.  

  • Employers’ liability insurance – if you have any employees, this is a legal requirement. This policy compensates staff if they’re injured or become ill because of work.  

  • Public liability insurance – compensates members of the public if they’re injured or have their belongings damaged because of your business.  

FAQs 

Protect your commercial assets with us

If you’re responsible for arranging commercial property insurance, it’s vital that the sum insured accurately reflects the cost of reinstating your premises to its original condition. Regularly reviewing your policy alongside a professional valuation helps keep the rebuild value in line with fluctuating construction and labour costs. 

To find out more and tailor a policy that protects your assets, speak to our team.

Speak to us:  01603 216387
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