Halloween might be the season for frightening stories, but for care providers, there is one risk that can have very real consequences: underinsurance.
Having an insurance policy in place does not necessarily mean your care home is fully protected.
If your buildings, contents or other assets are insured for less than their true value, you could face a significant financial shortfall following a major claim. In some circumstances, being underinsured can even reduce the amount paid on a smaller claim.
With rebuilding costs changing over time, reviewing the values declared to your insurer is an important part of protecting your care business.
Underinsurance occurs when the amount you have insured does not accurately reflect the value of the property or assets you need to protect.
For buildings insurance, one of the most important figures is the reinstatement value.
This is not necessarily the market value of your care home. It is the estimated cost of rebuilding the property following a total loss, including relevant costs associated with reconstruction.
If that figure is too low, your organisation could be underinsured.
Care properties can be complex buildings to reinstate.
Specialist facilities, accessibility requirements, commercial kitchens, lifts, fire safety systems and other features can all influence rebuilding costs.
There may also be professional fees, demolition and site clearance costs to consider.
A valuation that was appropriate several years ago may therefore no longer accurately represent what it would cost to rebuild the property today.
Imagine a serious fire causes extensive damage to a care home.
The building is insured for £2 million, but its correct reinstatement value is actually £2.5 million.
The provider is therefore insured for only 80% of the value that should have been declared.
The potential problem isn't limited to a total loss.
Depending on the wording of the insurance policy, an insurer may apply what is known as the Average Clause.
If the property is 20% underinsured, the insurer could potentially reduce a claim proportionately.
For example, subject to the individual policy wording, a £500,000 insured loss could result in a settlement of £400,000, leaving the business responsible for the remaining £100,000.
That is why underinsurance can have such serious consequences.
A professional Reinstatement Cost Assessment helps establish how much it could cost to rebuild your property following a total loss.
This is different from an estate agent's valuation or the amount you originally paid for the property.
An appropriate assessment considers the cost of reconstructing the building rather than its potential sale price.
For care providers, having an accurate reinstatement value can help ensure the declared value used for insurance purposes properly reflects the property being protected.
Don't wait for a major claim to discover that your sums insured are inaccurate.
Care providers should regularly review their insurance arrangements, particularly following significant changes to a property or business.
This might include extensions, refurbishments, new facilities, additional equipment or changes in how a building is used.
It is also important not to assume that automatically increasing last year's figure will always provide an accurate valuation. Periodic professional assessments can provide greater confidence that the figures being used remain appropriate.
No.
While buildings are one of the most obvious areas, underinsurance can affect other parts of an insurance programme too.
Contents, equipment and business interruption cover can all require careful consideration.
For example, care providers should think about how long it could realistically take to recover from a major incident. Rebuilding a care home, obtaining regulatory approvals, replacing equipment and returning residents to the service can take considerable time.
The right insurance programme therefore needs to consider not only the value of physical assets, but also what would be required to keep the organisation financially resilient while it recovers.
What does underinsurance mean?
Underinsurance means having insurance cover that does not adequately reflect the value of the property, assets or financial exposure being insured.
Is reinstatement value the same as market value?
No. Market value relates to what a property might sell for. Reinstatement value considers what it could cost to rebuild the property following a total loss.
What is the Average Clause in insurance?
Where applicable under a policy, the Average Clause can allow an insurer to reduce a claim proportionately when the amount insured is lower than the value that should have been declared.
How often should a care home review its reinstatement value?
Values should be reviewed regularly and following significant changes to the property. Periodic professional Reinstatement Cost Assessments can help ensure the figure remains appropriate.
Can underinsurance affect business interruption cover?
Yes. Appropriate business interruption cover needs to reflect both the financial exposure and a realistic period for the organisation to recover following a major incident.
As a specialist insurance broker dedicated to the care sector, Quality Care Group understands the potentially significant impact underinsurance can have on care businesses.
We can help providers review their existing insurance arrangements, identify potential areas of concern and arrange access to specialist Reinstatement Cost Assessments where appropriate.
The objective isn't simply to have more insurance. It is to make sure the cover you have reflects the organisation you are actually protecting.
Underinsurance is one Halloween surprise no care provider wants.
If you're unsure whether your current sums insured accurately reflect your property and business, speak to Quality Care Group about reviewing your insurance arrangements.
