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Insurance renewal can sometimes feel routine.
Last year’s information is reviewed. Values are checked. A few questions are answered. The premium is considered and the policy is renewed.
The assumption is that if nothing dramatic has happened, little has changed.
For care organisations, that assumption can be dangerous.
Buildings change. Services evolve. Equipment is replaced. Staffing models develop. Technology becomes more important. Costs increase and organisations expand.
Individually, these changes may feel manageable.
Collectively, they can create a gap between the organisation you operate today and the one your insurance programme was originally designed to protect.
That gap is where underinsurance can develop.
Underinsurance occurs when the amount insured does not adequately reflect the value of the property, assets or financial exposure being protected.
It is often associated with buildings insurance, where the declared value may be lower than the true cost of reinstating a property following a major loss.
But the principle can extend beyond buildings.
Contents, equipment and business interruption arrangements can all become inadequate if values, assumptions or recovery periods are not reviewed as the organisation changes.
One of the biggest challenges is that underinsurance usually does not create an obvious operational problem.
The policy still exists.
A certificate of insurance is issued.
Premiums continue to be paid.
Nothing necessarily appears wrong.
The weakness may only become visible when a significant claim occurs.
That is what makes underinsurance particularly important from a risk management perspective. It can remain hidden precisely because the organisation continues to operate normally.
Underinsurance is not always caused by one major mistake.
Often, it develops gradually.
A care home may be extended.
Additional bedrooms may be created.
Specialist equipment may be installed.
Construction costs may increase.
A service may expand into new activities.
Technology may become essential to daily operations.
Recovery from a major incident may take longer than originally anticipated.
None of these changes necessarily triggers an immediate insurance review.
Over several years, however, the difference between the values originally declared and the organisation as it exists today can become significant.
For buildings insurance, the key figure is generally the reinstatement value, not the market value of the property.
Market value considers what a property might sell for.
Reinstatement value considers what it could cost to rebuild following a total loss, including relevant reconstruction costs.
For care properties, this can be particularly important because buildings may include specialist adaptations, commercial kitchens, lifts, fire protection systems, accessibility features and other requirements that influence reconstruction costs.
An outdated valuation can therefore create a substantial gap.
Potentially, yes.
Depending on the policy wording, an insurer may apply an Average Clause where the declared value is lower than the amount that should have been insured.
That means underinsurance does not necessarily only matter following a total loss.
A business could discover that a proportion of an otherwise valid claim is not covered because the original sum insured was inadequate.
The best time to identify that problem is before a claim occurs.
Yes.
Business interruption insurance is designed to help protect the financial position of an organisation while it recovers from an insured event.
But the amount of cover and the period selected need to reflect how long recovery could realistically take.
For a care provider, recovery following a major property loss may involve much more than rebuilding.
There may be planning requirements, construction delays, replacement equipment, recruitment, regulatory considerations and the process of safely returning residents or reopening a service.
If the recovery period has been underestimated, the organisation may face another form of underinsurance.
Annual insurance renewal provides an opportunity to ask a much more useful question than:
“Is last year’s information still broadly correct?”
Instead, consider:
“If we were insuring this organisation for the first time today, what would we need to tell our insurer?”
That change in perspective can reveal developments that have gradually become normal internally but may materially affect risk.
Questions Care Leaders Should Consider
At renewal, leadership teams may want to consider whether:
The objective is not simply to buy more insurance.
It is to ensure the insurance programme reflects the organisation that actually exists.
What does underinsurance mean?
Underinsurance occurs when insurance values or limits are insufficient to reflect the true financial exposure of the organisation.
How can a care home become underinsured?
Property alterations, rising rebuilding costs, additional equipment, changing services and outdated valuations can all contribute to underinsurance over time.
Is rebuilding cost the same as property market value?
No. Reinstatement value considers the potential cost of rebuilding the property rather than what it might sell for.
Can underinsurance reduce a claim?
Depending on the policy wording, an Average Clause may allow a claim payment to be reduced proportionately where the property has been underinsured.
Should insurance values be reviewed every year?
Annual renewal is a useful opportunity to review whether values and assumptions remain appropriate, while periodic professional valuations can provide additional confidence.
Download the QCG White Paper
In Hidden Risks: Underinsurance, Simon van Os looks more closely at why underinsurance can remain unnoticed, how risk changes gradually and why organisations should treat insurance renewal as a strategic review rather than a simple annual transaction.
Quality Care Group specialises in insurance and risk support for the care sector.
If this article has prompted questions about whether your current insurance still reflects your organisation, speak to our team about reviewing your arrangements.
