Do you know the true replacement value of your strata property, not just the market value? If not, you could be one of the many strata owners at risk of being underinsured.
As one of Australia’s largest and most awarded insurance underwriting agencies, CHU have provided a closer look at how insurance in strata works.
Quick links: What does it mean to be underinsured? | Market value vs replacement value | Why does underinsurance occur? | The importance of strata valuations | How to minimise the risk of underinsurance in a strata complex |
What does it mean to be underinsured?
Increases in the cost of living and doing business has been rising, and at a faster rate than in many decades. This is largely driven by supply chain issues and labour shortages during the pandemic, the energy crisis, increases in catastrophe events and inflation. Each of these events put a strain on the insurance markets and is reflected in prices. These events can often lead to property insured values becoming too low.
Underinsurance occurs when the sum insured on an insurance policy is insufficient to cover the full cost of rebuilding, repairing, or replacing the building.
Market value vs replacement value
The market value of a property has no bearing on the price to rebuild a property.The replacement or rebuilding value of a property includes the construction cost, as well as other costs associated with the removal of debris, labour and materials, compliance with current building codes and local council planning provisions, professional fees, taxes and more.
In the current environment of increasing natural disasters, rising labour, and building material costs, having adequate insurance in place is more important than ever.
What is a building sum insured (BSI)?
The building sum insured is the maximum amount you can claim on your insurance policy for an insured event. It should be enough to cover the replacement value of your property if it is damaged or destroyed.
Why does underinsurance occur?
Underinsurance can occur for several reasons:
- Owners may have carried out renovations and have not updated their buildings or contents insurance policy to take account of the additional value.
- You may not have reviewed your policy or had your property valued recently so it may not factor in the rising cost of materials if you need to rebuild your property.
- Some additional costs like debris removal and architects or legal fees may not have been factored into the total cost to rebuild or repair the building.
- To keep premiums lower you may have kept your building sum insured amount lower without considering the broader implications of this.Unfortunately, many strata owners may be unaware of the issue of underinsurance until it’s too late and they’ve suffered a loss.
The importance of strata valuations
Given the current environment of inflation growth, increases in catastrophe events, increases in the costs of materials and labour shortages it is more important than ever for strata owners to be asking themselves whether they have sufficient insurance in place to protect their strata property if the unexpected happens.
It’s a legal obligation for an Owners’ Corporation* to ensure there’s no shortfall for the rebuilding of their strata property because if there is a shortfall, it’s the responsibility of the Owners’ Corporation to fund the gap. You can find out more about the rules in your State by contacting Fair Trading (or the equivalent government body).
In most states and territories building valuations for strata properties are required by law, but they also make good sense. Typically, they are carried out every two to three years. An accurate valuation of assets also helps avoid the risk of underinsurance.
What does an insurance valuation cover?
A detailed valuation will account for more than just the replacement value and should include the following:
- The cost of buildings and common property.
- External features like pavements, fencing and recreation facilities.
- Each lot’s permanent fixtures and structural improvements.
- Inflation and cost escalations for labour and materials.
- Professional fees.
- Demolition and debris removal costs.
How to minimise the risk of underinsurance in a strata complex
- Review the building sum insured amount annually (even if you do not get a new valuation), because events and factors like material costs could impact your building and repair costs.
- Obtain a new valuation every 2-3 years to assess and value your building’s full replacement and reinstatement cost.
- Factor in all necessary legislative requirements, including the removal of debris, professional fees and taxes, and the escalation of costs during the rebuild.
- Be aware of any undisclosed renovations and improvements by owners. Ensure owners are aware that the Owners’ Corporation must know about any works within their unit to ensure this forms part of the overall building sum insured.
- Consider Landlords insurance or Contents insurance to protect your personal possessions inside your property as strata insurance will only cover the building, common property and common area in a strata property.