The Sum Insured Trap: Why Most Freeholders Discover They're Underinsured at Claim

A block sits empty between tenants for six weeks. A pipe fails on the second floor and water runs unchecked for days before anyone discovers it. The building is insured, the policy is current, nothing about the property has changed. The claim still ends up in difficulty because somewhere in the workings, the sum insured was set too low. Nobody had to do anything for the damage to be worse than the cover available. It was already built into the figures.

That mistake is among the most common reasons freeholders find themselves carrying the cost of claims themselves, and it is worth understanding properly before you need to make a claim rather than afterwards.

General Information Disclaimer

This article is for information only and does not constitute advice on any particular policy. Insurance cover varies significantly between insurers and between individual policies, and the terms that apply to your property are those set out in your own policy wording. Before relying on anything here, check your wording or speak to a qualified broker who can assess your circumstances. For advice on a block of flats insurance policy, speak to our team.

What Block of Flats Insurance Covers

Block of flats insurance is a type of commercial insurance designed to protect the building structure and communal areas, not the contents of individual leaseholders' flats. The policy covers the physical structure: walls, roofs, internal communal areas, and the permanent fixtures the lease classifies as the landlord's responsibility (central heating, communal wiring, fitted kitchens in communal areas).

The core covers typically available are:

• Building insurance - covers the physical structure against fire, theft, flood, storm damage, vandalism and malicious damage. This is the foundation of the policy.
• Loss of rent - compensates you for rental income lost if the building becomes uninhabitable following an insured event. This is a critical cover if the block generates income. Loss of rent is a standard feature of commercial landlord insurance policies for blocks held as investments.
• Legal expenses - cover the costs of disputes involving the property: tenant and employment disputes, eviction proceedings, contract disagreements and certain tax matters.
• Employers' liability - is compulsory if you employ anyone, such as a property manager, maintenance staff or security, and covers claims arising from work-related injuries.
• Terrorism insurance - sits outside standard perils on many policies. Your mortgage lender may require it, and it is worth checking whether your insurer includes it as standard or offers it as an optional add-on.

Each cover can normally be tailored or excluded depending on your needs. A block without resident staff, for example, might decline employers' liability. A building with a managing agent who handles disputes might feel legal expenses are less pressing. The key is understanding what each component does and making an active choice rather than assuming a default policy has everything you need.

The Sum Insured: The Most Common Mistake

The single most frequent error freeholders make is setting the sum insured too low. A sum insured is the maximum amount the insurer will pay for any claim, and it should reflect the cost to rebuild the building from scratch.

This is not the market value of the building. A six-storey Victorian block worth £4 million may cost £2.8 million to rebuild if it were destroyed. The land value and location premium do not need to be rebuilt, and the calculation includes demolition, labour, materials, professional fees, building regulation compliance and VAT.

If the sum insured is lower than the true rebuild cost, some policies allow the insurer to apply a condition of average. This means the claim payment is reduced in proportion to the underinsurance:

Claim payment = claim amount × (sum insured ÷ true rebuild cost)

For example, if you have insured the building for £2.5 million when the true rebuild cost is £3 million, you are insured for about 83% of the actual risk. On a £200,000 fire claim, the insurer may pay only £166,667. You cover the gap yourself.

Crucially, this applies to every claim, not just total loss. It is a slow-burning, expensive mistake that only becomes apparent at the point of claim.

How to Set the Sum Insured

BCIS and the ABI both recommend a professional reinstatement cost assessment from a chartered surveyor for anything outside standard properties.

A surveyor's assessment costs several hundred pounds but is usually worth it where the sums at stake are large or the property is complex. It also provides documented evidence to your insurer, which can be important if the figure is ever questioned.

Review the sum insured at renewal and after major works. Many insurers apply an inflation index between renewals to keep the figure roughly current, but indexation does not correct a figure that was wrong to begin with, and it does not account for extensions or structural alterations.

Understanding Freeholder vs Leaseholder Responsibility

In most leasehold blocks, the freeholder or management company insures the building structure and recovers the cost through the service charge. That policy covers walls, roof, communal areas and the landlord's permanent fixtures.

Individual leaseholders typically insure their own improvements and contents. However, the boundaries are often unclear, and it is worth checking:

First, whether improvements you have made inside the building are covered by the freeholder's policy. Fitted kitchens, bathrooms and built-in wardrobes installed by the leaseholder may sit outside the freeholder's cover, and the leaseholder should have their own contents policy or declare them to the freeholder's insurer.

Second, whether there are gaps in the building cover that ought to be insured. If the lease places certain responsibilities (like external window repair or roof maintenance) with individual leaseholders rather than the freeholder, those items might not be covered by the building policy, and leaseholders should be aware.

Many disputes arise because neither party has checked the lease carefully enough to know who is insuring what. A few minutes spent reading the lease and checking with the managing agent can prevent expensive gaps. For landlords who own multiple blocks, our guide to how to calculate house rebuilding costs covers the detail of setting accurate figures across a portfolio.

The Difference Between Loss of Rent and Loss of Rent Guarantee

Loss of rent cover is commonly included as part of a landlord or blocks of flats insurance policy, although the exact cover and limits will vary between insurers. It is designed to protect rental income when an insured event, such as a fire, makes the property uninhabitable and prevents tenants from living there.

Loss of rent guarantee is a separate type of cover. Rather than responding specifically to an insured event that makes the property uninhabitable, it can provide protection against loss of rental income where a tenant defaults or fails to pay their rent, subject to the policy terms and conditions. It is typically subject to different underwriting and eligibility requirements and may cost more than standard loss of rent cover.

The two covers protect against different risks, so it is important to establish exactly what is included in your policy and whether you need additional rent guarantee protection.

When the Building is Unoccupied

If the block becomes unoccupied (whether because it is being refurbished, between ownership, or because leaseholders have departed), the standard block policy may not apply. Many insurers impose conditions on unoccupied properties: they may require more frequent inspections, restrict which perils are covered, or decline to renew if the building is empty for too long.

Unoccupied property policies exist for blocks in this position, but they are more restrictive and more expensive. Unlike cover for let commercial property, which assumes occupancy and trading activity, empty building policies are designed for buildings where occupancy cannot be relied on. If you know the building will be unoccupied, tell your insurer rather than hoping the standard policy will hold. Many claims are defended successfully because the insured failed to declare a change in occupancy.

Terrorism Insurance

Standard perils do not include losses caused by terrorism. If terrorism insurance is important (either because your building is at higher risk, or because your mortgage lender requires it), it is normally available as an optional add-on. Check your existing policy to see whether it is included as standard or must be requested separately. Your mortgage lender's requirements may dictate whether it is compulsory for you, even if you feel the risk is low.

Why Work With An Insurance Broker?

Specialist insurance brokers access a wider range of insurers and can negotiate covers tailored to a specific building, particularly where the block has features that fall outside standard offerings.

For a straightforward purpose-built residential block in good order, a direct quote may be sufficient. For older buildings, listed properties, buildings with mixed use, or blocks with complex lease structures, a broker who understands the property owners insurance market can place the business with additional care and consideration.

Block of Flats Insurance From Ellis David

Ellis David has been arranging block of flats insurance from Essex Road in Islington for over 50 years, and holds agencies with more than 100 UK insurers and MGAs. We take time to understand your building, your lease structure and your exposure before recommending the most suitable covers. 

For blocks with rebuild cost uncertainty, we can arrange a professional reinstatement assessment and present the findings to insurers with a proposal, rather than relying on a calculator or guesswork. We also handle any claims support and policy adjustments throughout the year, not just at renewal.

If you are uncertain about your current sum insured, or if your block has features that fall outside standard insurance offerings, get in touch with the team. You can also meet the people who would be handling it before you pick up the phone.

Block of Flats Insurance: FAQs

What is the difference between rebuild cost and market value?

Rebuild cost is what it would cost to reconstruct the building from scratch, including demolition, labour, materials, professional fees, building regulations compliance and VAT. Market value is what a buyer would pay, and includes the value of the land, location and local demand. A block worth £4 million might cost £2.8 million to rebuild. For insurance purposes, rebuild cost is what matters.

What happens if the sum insured is lower than the true rebuild cost?

Most policies contain a condition of average. The insurer may reduce the claim in proportion to the underinsurance. If you have insured for 80% of the rebuild cost, the insurer may pay 80% of any claim. 

Who arranges block of flats insurance?

In most leasehold blocks, the freeholder or managing agent insures the building structure and recovers the cost through the service charge. Individual leaseholders typically insure their own improvements and contents, though the boundaries are often unclear and worth checking against the lease terms.

When should I get a professional rebuild cost assessment?

A professional assessment from a chartered surveyor is worth arranging where the block is listed, built of non-standard materials, has unusual features, has been significantly extended, or is high value.

What is loss of rent insurance?

Loss of rent compensates you for rental income lost because the building has become uninhabitable following an insured event like fire or flood. It is standard optional cover on most landlord policies. Loss of rent guarantee is a different product and is less common. Make sure your broker is clear which one you are placing.

What cover applies if the block becomes unoccupied?

Standard block policies often change terms once the building has stood empty for a set period (commonly 30, 45 or 60 days, depending on the policy). Cover normally narrows and conditions attach. If you know the building will be empty, tell your insurer rather than assuming the standard policy will hold. Unoccupied property insurance can be arranged where the fallback terms leave too much exposure.

Does terrorism insurance come as standard?

No. Most standard perils do not include terrorism cover, which is typically optional. Your mortgage lender may require it, so check the requirements of your lender and whether your current policy includes it.