If there were one rule every property manager (common representative) had to learn about insurance, this would be it: the link between underinsurance and proportional settlement. Not because it is frequent – but because when it does happen, it comes to light at the worst possible moment, with the largest claim. And because it is entirely preventable.
- Underinsurance: the sum insured is lower than the building's true rebuild value.
- Its consequence is proportional (pro-rata) settlement: the insurer pays the claim in the same proportion as the sum insured bears to the true value.
- Preventing it is simple: a good starting amount plus a comparison at each renewal, if the building gets in touch in time. This is how the product works, not scaremongering – and there is a way to deal with it.
The rule – stated plainly
The general principle of property insurance: if the sum insured is lower than the true (rebuild) value at the time of the loss, the insurer typically settles the claim only in the proportion that the sum insured bears to the true value. An illustration of the mechanics – not a quote, just to show how it works: if a building is insured for two thirds of its true value, the settlement after a claim will typically come out at around two thirds of the loss, and the remainder stays with the building. The precise rules – and any allowances or tolerance bands – are set out in the terms of the insurer concerned.
Why this is not a “trick” by the insurer
Because the premium is proportional to the sum: a building insured for a smaller amount pays a smaller premium – which means it has in fact kept part of the risk itself. Proportional settlement simply makes that visible. The system is logical, only its timing is cruel: it goes unnoticed for years, then shows up precisely at the big claim. So we treat it as a fact, not as a bogeyman: it is not something to fear but something to rule out through maintenance.
How does a building drift into it?
Rarely on purpose. The typical routes: the amount stays unchanged for years while construction costs rise; the general meeting rejects indexation year after year to avoid a premium increase; a refurbishment, an extension or solar panels are added to the building without being reported; or the starting amount was set badly in the first place – by “rounding down”. Every route ends the same way: a building that looks sorted on paper is in reality only partly covered. On the causes and on the figure itself: rebuild value vs. market price.
Prevention in two moves
First: a well-sized starting amount – following the steps in the sizing article. Second: maintenance at the renewal date – accepting indexation or consciously overriding it, and a mid-term increase when something bigger changes. And towards the general meeting, the best argument is an honest frame: indexation is not “the insurer's way of pushing the premium up”, it is the building defending itself – that is how it is worth presenting. Ready-made materials for this: the general-meeting pack.
A question about your own building? Book a free 20-minute consultation →
