Underinsurance in Construction Projects: A Distinct and Growing Risk for 2026

Monday 13th April 2026

Underinsurance in Construction Projects: A Distinct and Growing Risk for 2026

Posted by Angus Nanan, Head of Construction, Kerry London Ltd

Underinsurance has become one of the most significant emerging risks for contractors heading into 2026. However, discussions in the market often blur two separate issues: underinsurance in property reinstatement and underinsurance in Construction Project Insurance. While related, they operate very differently.

For construction projects, the core exposures centre on accurate Estimated Contract Values (ECVs), the proper functioning (and clear limitations) of ECV uplift provisions, and the serious consequences of breaching maximum contract value limits. These issues have no direct equivalent in Buildings Insurance and represent unique risks for the construction sector.

With ongoing inflation in materials and wage costs, combined with increasingly complex project scopes, more contractors are finding that their declared values no longer reflect the true cost of works in progress.

Why Underinsurance is Increasing in Construction

Rising project and reinstatement costs

Costs for materials, logistics and specialist trades continue to fluctuate. Without regular ECV updates, declared values can quickly fall behind actual outturns.

Labour shortages and wage inflation

Skilled labour remains scarce. Wage inflation feeds directly into reinstatement costs, but declared values often remain tied to historic estimates.

Static or outdated ECV declarations

Tender values, early-stage cost plans, and provisional sums frequently change as projects develop. Unless policies are updated, insured values can lag significantly behind actual expenditure.

Understanding underinsurance in construction vs buildings insurance

Buildings Insurance underinsurance is relatively straightforward:

If the declared reinstatement value is too low, the Average Clause applies, and the claim is reduced proportionately.
The building itself is still insured, so a total declinature is unusual.

Construction Insurance is different. It involves two underinsurance exposures:

1. Understated Declared Values (ECV or sum insured)

This is the type of underinsurance most people recognise.

How it works

The contractor declares an ECV or sum insured.
If this value proves too low at the time of loss, Average applies, reducing any claim proportionately.
Many policies include a 10-20% ECV uplift provision to allow for moderate mid-project increases.

Limitations of ECV uplift

An uplift provision does not replace accurate valuation. It cannot:

Correct an ECV that was materially understated at inception
Protect a project experiencing major cost escalation, variations or design changes
Prevent Average from applying if the uplift is insufficient

Once the uplift is exhausted, the insured remains exposed to proportional reductions.

2. Breaching the Maximum Contract Value Limit (unique to Contract Works)

This is where Construction Insurance differs dramatically from Buildings Insurance.

Maximum contract value is usually a hard limit – a contractual boundary on what the insurer is willing to cover.

What happens if a project exceeds this limit?

In many Contract Works wordings:

The insurer covers only contracts up to the stated maximum value.
Any contract exceeding that limit is treated as outside the scope of insurance.

Key distinction

This is not underinsurance in the Average sense.
It is a breach of policy terms regarding eligibility

Consequences

Where the maximum contract value limit is breached:

The insurer may decline the claim entirely.
There is no proportional settlement.
There is no application of Average.
There is no benefit from ECV uplift provisions.
The contract is simply not an insured contract under the policy.

This is a fundamental difference between Construction Insurance and Buildings Insurance and a key area of exposure for contractors in 2026.

Other Common Policy Gaps in Construction

Plant, tools and machinery underinsurance

Replacement costs for plant have risen sharply. Many declared values lag current market prices, creating underinsurance exposures.

Mid-project escalation of works

Variations, material substitutions, and ground condition changes regularly increase project costs. Unless reported, the declared values become inaccurate.

Business interruption

Global supply chain constraints and specialist equipment lead times mean traditional indemnity periods are often too short for modern reinstatement programmes.

Why This Matters in 2026

Despite signs of stabilisation, cost pressure and inflationary volatility remain. Insurers are expected to maintain strict scrutiny of:

Declared ECVs
Supporting documentation
Adequacy of ECV uplifts
Compliance with maximum contract value thresholds

Projects that drift beyond declared limits or exceed eligibility thresholds are likely to face reduced settlements – or in some cases, full declinature.

Accurate, dynamic management of ECV and contract limits is therefore essential to protect margins and business continuity.