Why Your Care Home Should Consider Underinsurance

The problem with underinsurance is that it’s a silent phenomenon. Unlike a leaky tap or a flickering bulb, it doesn’t announce that it’s there.

The premise of underinsurance is simple enough: it’s when your insurance policy undervalues the thing being insured. Every day, people and businesses up and down the country are falling victim to it.

In the Caring Together podcast, Marc Corcoran, Product and Capacity Director of Towergate Insurance, joins Tom McDermott of Ardonagh Advisory to discuss why underinsurance should have been on your care home’s radar yesterday – and what to do next.

‘The underinsurance clause’

Most people only realise that they’re underinsured when the time comes to make a claim. Unfortunately, by then, it’s too late.

Insurers won’t just outright reject your claim if it turns out you’re underinsured. Instead, they’ll effect something that’s known as the ‘Average’ clause in the insurance world, which  reduces your final payout proportionate to the amount you’re underinsured.

Marc explains, “Let say you had a property worth £200,000 to rebuild, but you only insured it for £100,000 because that was the amount you thought it was. In the event of a claim, the insurer is going to apply the underinsurance clause because you’ve not specified enough cover...you’ve underinsured the risk. So, if you tried to make a claim for a total loss and you needed to claim £200,000, the maximum your insurer would pay is £100,000.” This of course means that you would have to fund the remaining repairs or losses yourself.

The Average clause, then, is a calculation that’s used by insurers to work out how much to pay out to the claimant when they’re underinsured. It’s simply the difference between the real value of the property vs the value you said it was, expressed as a percentage that the insurer will then apply to any eligible claim you make on that policy. Marc illustrates, “Let’s say you had the same situation, so the property is worth £200,000 and you’ve insured it for £100,000. In the event of a storm, and the storm damage claim was £20,000 and otherwise eligible, the Average clause will still be applied, and that claim would be reduced by 50% again, so you’d only be getting £10,000 out of the £20,000.”

How do you become underinsured in the first place?

There’s a reason over 40% of commercial buildings in the UK are underinsured[1] – and that’s because it’s easy to be.

Inflation remains the most constant reason for widespread underinsurance. As inflation means that things cost more than they did last year; it follows then that the property value you gave your insurer five years ago will be insufficient by today’s metric.

But there are other things besides inflation that can contribute towards your care home being underinsured – building renovations, for example. Marc explains, “If you’ve had alterations or extensions done to your property, that could materially change the value of your property or the rebuild. If you base your valuation on developers’ costs, that could quite often be much lower than a one-off rebuild cost.”

Another thing that can lead to underinsurance is forgetting to include all elements of your property or estate in your valuation. “Outbuildings, car parks, driveways, gates fences, boundary walls...all of those things make up your policy when it comes to property, so it needs to be considered when you’re thinking of your rebuild value,” Marc advises.

What do insurers do to combat underinsurance?

Of course, it’s not wholly up to the policyholder to ensure they’re adequately insured. Insurers also have their own methods of ensuring that property valuations reflect modern inflation readings.

Insurers use something called index linking to do this. Marc explains, “[Index linking] is a very simple method that we use to adjust the sum insured to reflect the changes of building costs throughout the year.”

Like the Average clause, index linking is also expressed as a percentage, and allows insurers to see the impact inflation has had on building costs on a year-by-year basis. Marc elaborates, “Between December 2022 and April 223, there was around an 18-20% inflation on buildings. So, if you do that year on year for two or three years, the index linking is a standard measure you put onto very basic properties or very basic policies to protect as much as we can...from underinsurance.”

Identifying underinsurance before it’s too late

While index linking is an important tool, its downside is that it’s oftentimes too simple; it doesn’t necessarily work for policies that are more complex, as your care home policies are likely to be.

Towergate are pre-empting the nasty surprise of underinsurance by implementing a simple RAG (red, amber and green) system for all existing policies. At the point of renewal, every Towergate policy will be analysed and given a score of adequate insurance (green), may require attention (orange), and requires immediate attention (red). The good thing about this system is that policyholders don’t need to do anything to activate it. It’s simply a score that you receive.

If you’re concerned about the score you’ve received – or even if you’ve received a green rating and simply want to talk through it – you can contact Towergate to get a full CPA. That’s a full policy valuation to check that it’s adequately meeting the needs of your care home and won’t leave you underinsured if the worst was to happen. “So, in the event of a claim, you’d have evidence and a document that proves that the sums that you insured for were absolutely correct at the time of purchase,” Marc says.

So, should you be worried?

Underinsurance can seem like a daunting topic, and no one wants to be on the hook for funds their insurer isn’t paying out, but it’s important to remain even keeled.

You shouldn’t worry, Marc says. “We’ve just got to make sure that you’re protected – your people are protected – as accidents will happen and human error will happen. You don’t need to be worried. You just need to be vigilant.”

Listen to the full podcast here.

Want to know more about our underinsurance RAG system and how it could help you? Contact Towergate today at newcare@towergate.co.uk or 0330123 5154.

This article is for general awareness on the given topics and any decisions about policy coverage should only be made through discussion with the appropriate contacts following the normal processes.

About the author

Carolyn Baker-Mellor is a respected industry leader with over 35 years' experience within the care insurance sector.

Carolyn currently works at Towergate as Head of Care Insurance.