Is your strata building adequately insured?

Date Published: 9 April 2019, updated 30 September 2024

As an owners corporation or body corporate of a strata property, it is your shared responsibility to ensure that the physical property, including all the shared common areas is adequately insured.Strata insurance is essential for safeguarding your strata property, and understanding the factors that influence its cost and coverage is key.

For instance, if your strata building is damaged and requires repairs or rebuilding, rising labour and material costs can potentially affect insurance premiums. This highlights the importance of not only having strata insurance but also performing regular valuations to ensure your property remains adequately protected over time.

In this article, we'll look at how these factors influence strata insurance and why maintaining adequate coverage is crucial in protecting your property and avoiding underinsurance.

Understanding Replacement Value vs. Market Value

Strata insurance should be based on the replacement value of a property rather than its market value. Market value refers to the current sale price of a property on the real estate market whereas replacement value or ‘full rebuild value’, is the cost of rebuilding or repairing the property to its pre-loss condition. While market value affects the sale price of the strata property, it does not account for the specific costs required to rebuild or repair it.

Whilst there are some minor differences in legislation between states and territories, a common theme across all jurisdictions is the need to insure for full replacement and reinstatement value.

Due to fluctuations in building costs, owners corporations are required to obtain an updated estimate of all expenses related to replacing or repairing the building.

These costs include:

Building Code Compliance: This covers the costs associated with meeting current safety and construction standards. Building codes may require updated materials or methods that can significantly affect the cost of rebuilding.
Debris Removal: After a disaster, there are expenses related to clearing debris from the site. This process involves not just physical removal but also proper disposal, which can be costly.
Labour Costs: Labour costs can influence the replacement value of a strata property since they directly impact the overall expense of rebuilding or repairing. In times of high demand or labour shortages, wages may rise, leading to increased costs for construction services. This means that even if market values drop, the cost to replace or repair a property may remain high. Therefore, accurately reflecting labour costs in your strata insurance coverage ensures that your strata property is fully protected against potential financial shortfalls in the event of damage or loss.
Materials: The cost of construction materials and supplies, such as timber, steel, and concrete, often exceeds market values. Material prices can be volatile and may increase due to supply chain issues or higher demand.

Ensuring that your strata insurance covers these factors based on replacement value is essential for adequate protection.

Factors Influencing Replacement Value

Several factors impact the replacement value of a strata property, including:

Inflation: High inflation increases the cost of materials and labour, driving up replacement costs even if property values decline.
Building Codes: Updated building codes may require more expensive materials and construction techniques, raising replacement costs.
Building Price Index: This index tracks changes in construction costs over time, which can affect replacement costs regardless of property market values.

For instance, the national Building Price Index (as of Q2 2024) showed a 0.5% increase, reflecting ongoing pressures on construction costs. Even though this is slower than previous years, costs remain significantly higher than pre-pandemic levels. **Statistics obtained from CoreLogic’s Cordell Housing Index Price (CHIP) report dated July 2024.

Rising costs of materials and labour can significantly affect strata insurance:

Example:

Consider a strata building insured for $5 million two years ago. If construction costs have risen by 30% due to increased material and labour costs, the replacement value could now be around $6.5 million. In the event of significant damage, an outdated insurance sum might not cover the full replacement cost, leaving a potential $1.5 million shortfall.

Can Declining Property Values Impact Strata Insurance?

Even if property values decline, the replacement value of a building remains unchanged. Factors such as debris removal, labour, and materials are not directly influenced by market values. Therefore, reducing insurance coverage based on declining property values can lead to inadequate coverage.

Example:

A strata building once valued at $10 million might be worth $8 million due to a market downturn. However, the cost to rebuild remains at $10 million due to ongoing expenses. Reducing insurance coverage to match the lower market value could leave a significant coverage gap.

What Happens if Your Strata is Underinsured?

If a property is inadequately insured, unit owners may be left with substantial financial burdens in the event of significant damage or loss. With increasing living costs and potential market downturns, maintaining adequate insurance coverage is more crucial than ever.

Tips To Ensure Adequate Insurance Coverage

Regular Valuations: Obtain a new building valuation regularly – Regardless of whether this is a legislative requirement, ensure you engage a suitably qualified professional to assess and value your building on a full replacement and reinstatement basis.
Include all Additional Costs: Make sure the professional expert factors all necessary additional costs (such as removal of debris, professional fees and taxes, escalation of costs during the rebuild phase, etc).
Justify Coverage Adjustments: If the professional expert determines a sum insured lower than the existing level of cover, obtain justification to clarify the decrease.
Report Renovations: Undisclosed renovations and improvements – Make owners aware that any works within their unit should be notified to the Body Corporate to ensure this is factored into the overall building sum insured.
Understand Coverage Limits: Whilst CHU’s strata policy does not provide cover for Lot Owners Contents (CHU can provide cover for contents under a separate Landlords or Contents policy), fixtures and structural improvements do form part of the Insured Property and are therefore covered by the Body Corporate insurance policy. A simple notation on an AGM agenda paperwork would create awareness surrounding this requirement.
Prepare for Disaster: Ensure you have adequate protection for the worst case scenario – Past catastrophes and natural disasters have illustrated the significant escalation of costs associated with rebuilding.

Make sure your building sum insured is adequate to provide protection if the unthinkable was to occur and consider safeguarding any potential shortfall in cover by obtaining Catastrophe insurance, designed specifically to protect against the escalation of costs as a result of a catastrophe.

Note: Catastrophe cover is not a top-up for underinsurance and is only applicable in the event of a declared catastrophe by the Insurance Council of Australia.

Insure Your Strata Building Adequately To Avoid Underinsurance

Understanding the impact of rising costs on strata insurance helps maintain adequate coverage. Whether house prices are rising or falling, the replacement value of your property is the determining factor for your choice of insurance coverage. Regularly updating residential strata insurance to reflect the true replacement cost is essential to avoid issues such as underinsurance and potential financial strain. To ensure your strata property is adequately covered, contact CHU Insurance today.

Important note

Insurance issued by QBE Insurance (Australia) Limited ABN 78 003 191 035 and distributed by CHU Underwriting Agencies Pty Ltd ABN 18 001 580 070 AFSL 243261. Any advice in this document is general in nature and does not take account of your personal objectives, financial situation and needs. Read the relevant Product Disclosure Statement before acquiring any products mentioned.