Closing the care home underinsurance gap
Running a care home in the United Kingdom carries enormous responsibility, ranging from the wellbeing of residents to the performance of staff and the ongoing expectations of the UK regulatory bodies. Yet one of the most persistent and costly risks facing the sector is often overlooked: the growing issue of underinsurance.
Many operators believe their insurance arrangements are adequate, only to discover during a claim that the cover in place does not reflect the true cost of rebuilding, refitting or sustaining the operation after a major incident. In a climate of rising inflation, regulatory pressure and increasing operational costs, understanding underinsurance has never been more important.
Understanding underinsurance
Underinsurance occurs when the values declared on an insurance policy are lower than the amount needed to cover a loss. This can relate to buildings, contents, business interruption cover, medical and care equipment.
For care homes, this problem is especially significant because the cost of reinstating a building or maintaining the business after a major loss is far higher than most operators expect. If a loss occurs and the insurer finds that the declared value is lower than the true reinstatement cost, the claim payment may be reduced proportionately. This can create a substantial financial gap at the worst possible time.
Why underinsurance is widespread in UK care homes
One of the most common causes is the rapid rise in rebuild costs. Materials, skilled labour and specialist services have all seen sharp increases in recent years, particularly for buildings that contain fire systems, assisted-living adaptations and fitted clinical facilities.
Another frequent issue arises when buildings are improved without notifying insurers. Care homes regularly invest in extensions, new bathrooms, upgraded kitchens, dementia-friendly design elements and specialist installations such as hoists or nurse-call systems. When these enhancements are not reflected in the policy value, the total insured amount becomes inaccurate.
Business interruption, also known as Loss Of Revenue cover, is another area where underinsurance occurs. Many care homes assume that a twelve-month indemnity period is sufficient, yet the reality of rebuilding a regulated property, securing planning approvals, reinstating specialist facilities and completing re-registration with UK regulatory bodies means the recovery time is often much longer. A period of twenty-four to thirty-six months is more realistic in the event of a major fire or flood.
Misunderstandings about rebuild costs also contribute. Older properties, or homes that were converted many years ago, cannot simply be rebuilt as they once were. Modern building regulations, fire safety requirements, infection control measures and accessibility standards must all be met. The cost of compliance alone can significantly increase a rebuild valuation.
Finally, care homes often underestimate the value of contents and equipment. Profiling beds, hoists, slings, medical devices, commercial kitchen machinery, technology, security systems and residents’ welfare equipment all add up. Replacing everything after a serious incident can be far more expensive than expected.
The real impact of underinsurance
When underinsurance is discovered during a claim, the financial impact can be severe. Insurers may apply what is known as the average condition, meaning the settlement is reduced in proportion to the level of underinsurance. Even a partial loss can result in a major funding shortfall that the business must cover itself.
If business interruption cover is inadequate, the home may run out of protection before it is ready to reopen. That can jeopardise staffing stability, contractual relationships with commissioners, ongoing financial obligations and overall financial viability. In the worst cases, an operator may be unable to continue trading.
How care homes can avoid underinsurance
A professional valuation from a qualified surveyor is one of the most important steps a care home can take. This ensures that the building sum insured reflects current costs. These valuations should ideally be reviewed every three to five years, with interim reviews if significant modifications are made.
Regularly updating contents values is equally important. A room-by-room assessment helps capture the true cost of medical equipment, IT systems, furniture, clinical devices and other essential items.
Business interruption insurance also deserves careful consideration. Operators should consider the realistic time required to rebuild a regulated facility. Longer indemnity periods offer vital protection.
Finally, working Christie Insurance can make a significant difference. As a sector specialist, we understand the regulatory environment, the pressure points within the industry, and the expectations insurers have when assessing risk.
Get in touch with the Christie Insurance team:
T: 01908 920570
E: enquiries@christieinsurance.com