Is your strata building adequately insured?
Reports in the media are widespread regarding declining house/unit prices from historical record highs with experts predicting will continue to fall for the foreseeable future. With this in mind some Body Corporates may believe a reduction in sum insured for their strata asset is justified. We explore how a reduction in house prices has no effect on the replacement value of a building and why having adequate insurance in place is more important than ever.
Market value Vs Replacement value
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.
The market value of a property has no bearing on the price to rebuild a dwelling, which incorporates costs associated with removal of debris, labour and materials, compliance with current building codes and local council planning provisions, professional fees, taxes, and more.
So what affects Replacement values?
Whilst housing prices may be falling, the costs associated with the building industry continue to rise.
The building price index shows continued growth quarter on quarter, year on year and it continues to consistently outpace increases in the Consumer Price Index (CPI).
Furthermore, this growth is a long term trend dating back to 2003, where quarterly growth in the building price index has averaged 1.1% compared to inflation at 0.6%. (*)
(*) Statistics obtained from CoreLogic’s Cordell Housing Index Price (CHIP) report dated June 2018
What does this mean?
The consequences of having inadequate insurance cover for unit owners could be disastrous. In the event of a major loss or event leading to the complete destruction of a building, any shortfall in insurance cover has to be funded by the unit owners.
With the cost of living increasing combined with a potential market downturn effecting unit owners’ most important asset, the need to have adequate insurance cover is more important than ever.
How do we know we have enough insurance cover?
There are many ways to minimise the potential for “underinsurance”, including:
- Obtain a new valuation regularly – Regardless of whether this is a legislative requirement, ensure you engage a suitably qualified professional expert to assess and value your building on a full replacement and reinstatement basis.
Make sure the professional expert factors all necessary legislative requirements (such as removal of debris, professional fees and taxes, escalation of costs during the rebuild phase, etc).
If the professional expert determines a sum insured lower than the existing level of cover, obtain justification to clarify the decrease.
- 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.
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.
- Ensure you have adequate protection for the worst case scenario – Past catastrophe 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 furthermore, 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.
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.