How Can the Healthcare Sector Combat the Risk of Underinsurance?

The healthcare sector is under increasing financial and operational pressure. From rising patient expectations, increasing medical equipment costs and rapid advances in technology, challenges are becoming more complex and expensive to manage than ever before. Against this backdrop, accurate insurance coverage is essential. Yet the evidence shows the healthcare sector is falling short.

Our annual underinsurance report identified healthcare as one of the sectors most exposed to underinsurance. While a level of underinsurance is notable across all industries inspected, the hospitals, care homes, and clinics locations we inspected were underinsured by more than 100 per cent, i.e. they were insured on average for under half of the assessed current reinstatement cost. This means that in the event of a major loss, many healthcare providers would receive a significant shortfall in the funds needed to reinstate their assets.

In this article, we examine why healthcare organisations are especially vulnerable to underinsurance, the consequences for providers and patients, and the practical steps that can help you ensure that your declared values are accurate.

What does underinsurance mean for the healthcare industry?

Underinsurance is when a policyholder has inadequate insurance for their needs – essentially, for property damage cover, this means the declared value for the assets on an insurance policy is lower than their true reinstatement cost. In practice, this means that if a claim is made, insurers may invoke the ‘average’ clause in the policy and pay-out only the ratio of the declared value to current reinstatement cost, meaning the policyholder would need to find additional funds to repair or rebuild the insured property to its full operational standard.

Unlike some industries where there may be ways and means of mitigating the impact of underinsurance, hospitals, clinics and care facilities deliver essential services that cannot simply pause or relocate while funding gaps are addressed. 

The assets involved (medical equipment, laboratories, specialist theatres and complex care infrastructure) are among the most expensive and complex to reinstate. On top of this, providers must follow strict regulatory and compliance obligations, meaning any reinstatement must not only replace what was lost but also meet modern standards.

As a result, underinsurance in healthcare not only poses a financial risk; ultimately, it may threaten the ability to deliver patient care.

7 reasons why the health sector is particularly vulnerable

Healthcare providers face a unique set of challenges that make them particularly exposed to underinsurance. These include…

1. High-value medical equipment

Advanced diagnostic and treatment machines such as MRI and CT scanners, and radiotherapy equipment, can cost several million pounds each. With turbulent inflation and foreign exchange rates, a policy based on outdated figures can easily fall short by millions. For example, an MRI scanner valued at £1.5 million five years ago may now cost over £2 million to replace, leaving a significant funding gap in the event of loss or damage.

2. Complex facilities and infrastructure

Hospitals and clinics are not simple buildings. They may contain operating theatres, sterile laboratories, hazardous material handling facilities, intensive care units and specialist pharmacies. Following a major fire, for instance, reinstating a laboratory may not simply be a matter of replacing benches, shelving and storage; it must be rebuilt to current standards, perhaps meaning the enhancement of features such as air filtration and temperature controls.

3. Rising construction and labour costs

Post-pandemic inflation has sharply increased the cost of materials and skilled labour across construction projects. A hospital wing that cost £10 million to build a decade ago may now require more than double that amount to reinstate. 

4. Regulatory compliance and standards

Healthcare facilities must be reinstated to meet current regulatory and clinical standards, not merely like-for-like, which can significantly increase costs. If you were to rebuild an intensive care unit, as an example, it would need to be rebuilt in compliance with the latest infection control regulations, ventilation systems and patient safety protocols. 

5. Frequent expansions and upgrades

To improve patient care, many hospitals and care homes undergo continual investment in new wings, renovated wards or upgraded diagnostic equipment. If declared values are not reviewed following these changes, policies could remain based on outdated asset registers. 

6. Budget pressures 

In an attempt to keep premiums low, healthcare organisations facing financial constraints and limited budgets may be tempted to under-declare values. While this may provide short-term savings, this risks a severe consequence in the event of a claim later down the line. 

7. Demarcation

Healthcare facilities can be some of the most complex in terms of building and equipment services. Areas can have a range of services providing gases, power, air and ventilation. Particularly for leased premises this can cause confusion and gaps in cover where landlord and tenant may not comprehend their insurance obligations.

The consequence of underinsurance in healthcare

The consequence of underinsurance in healthcare extends well beyond financial shortfalls. When hospitals, clinics and care providers are unable to secure the full funding required to reinstate operations, this creates a ripple effect across patient care, compliance and public confidence.

Financial risk

Underinsurance can mean that claims pay-outs fall short of actual reinstatement costs. A hospital underinsured by 50 per cent may only receive half the funds required to replace damaged assets or rebuild facilities, leaving the organisation to find the balance. With high-value medical equipment and complex facilities, this can amount to tens of millions of pounds. For any organisation, this could be devastating.

Operational risk

Downtime in healthcare directly affects patients. Underinsurance delays recovery by either delaying the claims process and recovery of funds from insurers, or leaving providers without the resources to reinstate facilities.

Reputational risk

Trust is fundamental in healthcare, and patients expect services to be reliable. Prolonged closures due to underfunded rebuilding projects can cause lasting reputational damage. Once confidence is eroded, rebuilding it is often harder than reinstating the physical assets themselves.

How to set the right declared values for your hospital or healthcare facility

To reduce the risk of underinsurance in healthcare and safeguard patients, getting your declared values right is key. To help mitigate this risk, our team of valuation experts has put together the following steps to help organisations ensure that insurance cover reflects the true reinstatement costs of their facilities and equipment.

Check declared values regularly: Declared values should be reviewed annually and based on current assets and consideration of current costs. 

Adjust for inflation and market volatility: Medical equipment and construction costs are particularly exposed to inflationary pressures. For overseas manufactured equipment, adjusting for foreign exchange movements may also be prudent every year. Policyholders should monitor market conditions and update declared values accordingly. 

Factor in hidden costs: Often overlooked, declared values to insurers should include allowances for demolition and debris removal, as well as for professional fees e.g. architects, engineering, planning.

Partner with valuers who understand healthcare: Specialist insurance valuation providers with experience in the healthcare sector can provide assessments tailored to the unique aspects of the sector and can also help identify common blind spots, such as high-value diagnostic equipment or the impact of market costs, that may otherwise be missed. 

Get a healthcheck on your declared values

In a sector where ongoing medical care will depend on the rapid reinstatement of facilities, equipment and systems, underinsurance is a risk that cannot be ignored.

Regular professional valuations, careful adjustment for inflation, and a full consideration of compliance and hidden costs are essential steps for safeguarding continuity of care. 

We encourage all healthcare providers to review their declared values for gaps in coverage and, where necessary, seek a professional valuation. 

Speak to the team at Charterfields to discuss your healthcare reinstatement costs and how we can help ensure your assets are accurately assessed and properly insured.