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Most commercial property owners are carrying less insurance than they need, creating a quiet but serious valuation gap that can turn a total loss into a financial shock. For investors and operators already fighting higher operating costs and tighter financing, getting insured values right has become a core risk-management and capital-preservation issue rather than a back-office chore.

As insurance costs have climbed alongside other commercial real estate operating expenses, owners have focused on cutting premiums. That often means using captives, pushing on multifamily pricing or even factoring insurance availability into office investment decisions. Yet one of the biggest risks is simple underinsurance driven by outdated property values.

Sophie Bird, senior vice president of commercial lines at IMA Financial Group, said underinsurance has become so common that her team now assumes new accounts will arrive with a valuation gap. She described accounts where owners only discover the depth of the gap after a total loss, when claim payments fall short of reconstruction costs because policy limits were never updated.

Bird pointed to a 2022 Kroll study of 1,455 properties valued between 2020 and 2021. It found that 68 percent of buildings were underinsured by at least 25 percent, and 19 percent by 100 percent. For investors who have spent years reworking capital stacks and sharpening asset strategies, that kind of uninsured exposure can erase years of work with a single event.

“We find valuation gaps quite regularly when reviewing new prospects,” Bird said. For her, it is now more surprising to see a fully updated and adequate limit than to see one that is materially short. This dynamic creates a dangerous mismatch between how assets are valued on a balance sheet versus the cost to replace them physically. While market prices might fluctuate or stabilize, the hard costs of labor and steel rarely move in step with investment sentiment, leaving owners exposed when the physical reality of construction collides with financial expectations.

Market Value Versus Insurable Value

One of the core problems in closing the gap is how owners think about value. Market value is often top of mind for investors, but it is not the number that matters when a building has to be reconstructed. Insurable value is typically higher because it reflects future labor and materials costs rather than what a buyer might pay in the current market.

Bird said carriers have been pushing harder on this distinction for several years. “Over the last five to seven years, carriers have become much more aggressive about scrutinizing values and requiring increases to property limits where they believe buildings are underinsured,” she noted. While that pressure has eased somewhat recently, she still sees many accounts where insured values trail actual reconstruction costs.

When clients are reluctant to undertake a full valuation review, Bird said she starts by sharing CoreLogic analysis to frame the conversation. “I often remind clients that the estimated values can be conservative compared to what many contractors would quote to rebuild a structure today,” she said. For owners, the takeaway is that any quick estimate is likely the floor, not the ceiling, on what it will cost to put a damaged building back into service.

Bird argues that property valuation should not be a transactional exercise, but rather a consultative risk management conversation focused on the client’s long-term objectives. That means treating insured value as part of a broader strategy around capital preservation, debt compliance and portfolio resilience, rather than as a line item to minimize at renewal.

Policy Structures And Coinsurance Traps

Beyond the headline limit, policy mechanics can make valuation gaps even more painful. Bird highlighted coinsurance requirements as a particular problem because they can impose restrictions and penalties at the time of claim when values are too low. Owners who have not fully understood those provisions may be surprised by how much they reduce recoveries.

She said property owners need to understand coinsurance and its practical implications before binding coverage. This includes how the clause interacts with insured values, reconstruction costs and any decision to keep limits flat while building costs rise. When owners choose not to increase limits despite clear evidence of underinsurance, experienced brokers document the discussion.

Bird said they will seek written acknowledgment that the client has been advised about the gap and has declined to take action. That protects the broker, but it also shows how deliberate some underinsurance decisions have become in a cost-conscious environment.