Commercial Property Insurance Lags as Rebuild Costs Rise

By Courtney Rivera 22/08/2026 4 min read 3 views

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 balance-sheet 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, not a back-office chore.

As insurance costs have climbed alongside other commercial real estate operating expenses, owners have focused on cutting premiums and squeezing savings out of their programs. That can mean using captives, pushing on multifamily pricing or even factoring insurance availability into office investment decisions. But one of the biggest and least discussed risks is simple underinsurance driven by outdated property values.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 commercial property accounts will arrive with a valuation gap rather than treating it as an exception. In an interview with Insurance Business, she described accounts where owners only discover how deep that gap is after a total loss, when claim payments fall well 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, meaning coverage was only half of what it would take to rebuild. For investors who have spent the last several 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,” she said. For her, it is now more surprising to see a fully updated and adequate limit than to see one that is materially short.

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 after a loss. 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, she 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.”

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. It should be 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.

This isn’t a new problem in commercial real estate, but the current cost environment has made it sharper. Rebuilding expenses have climbed steadily for years, and owners who locked in limits when rates were lower now face a wider spread between what they insured and what a contractor would actually charge to bring a damaged property back online.

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. That 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.