When was the last time your strata committee/body corporate reviewed its building insurance? If it’s been more than two years, we strongly recommend revisiting it again. Recent increases in building replacement costs means your property could now be underinsured and this can have big ramifications.
Building insurance is a full ‘all risk’ level of cover that protects a property from insured events such as water or storm damage, a fire, burglary, malicious or accidental damage or an earthquake. Depending on where you live in Australia, building insurance policies may also offer optional extras such as flood and catastrophe cover as well as office bearer’s liability insurance to protect a committee against any claims.
In terms of inclusions, building insurance covers the structure of the property and any permanent fixtures and fittings such as mirrors, built-in wardrobes, bathroom vanities and pergolas. If you accidentally break a bathroom wall mirror or drop a hairdryer and crack your bathroom vanity, you may be able to claim the repairs through building insurance. Building insurance also covers improvements to common property areas such as landscaping and driveways.
Items not covered by building insurance include carpets and curtains. Contents are not covered as they don’t form part of the building structure; individual owner occupiers or tenants are encouraged to insure their contents. Landlords need to be aware that curtains, carpets, light fittings and other contents items, which form part of the leased property, are not covered by the strata insurance so they may like to consider a landlord insurance policy for additional peace of mind. Wear and tear and general maintenance issues such as rusty gutters and building defects also aren’t covered by building insurance.
In most states and territories across Australia, the
legislation requires the property and or the common property need to be insured for replacement value. Replacement value needs to include all associated costs such as demolition, removal of debris and any cost escalations that have occurred over the insurance periods. Body corporate owners can be fined if the building is not insured. Contact your local Whittles branch to find out how the building insurance laws apply where you live and what your responsibilities are.
Commercial properties, such as offices and warehouses, are typically covered by the same legislation as residential properties in Australia which means the obligation is on the strata committee or body corporate to have cover in place.
A key question to be answered when it comes to commercial building insurance claims is: who owns the internal fit out – the lot owner or the tenant? Commercial tenants often pay for, and install, their own fit outs which means it’s up to them to insure it. If the tenant vacates a space and doesn’t take the infrastructure they installed by the time the lease expires, ownership of any remaining fixtures and fittings is transferred to the landlord or lot owner. If this happens, the fit out is then covered by the body corporate’s building insurance policy excluding carpets and curtains.
Building replacement costs have increased significantly in the past two years fuelled by international and domestic factors including the COVID-19 pandemic, the war in Ukraine, the rising cost of building materials, supply chain issues, skill shortages and the recent floods in Queensland and New South Wales. These factors combined have driven overall construction costs up by between 20 and 30 per cent in the past 24 months.
This means if your property experiences major damage, it’s going to cost a lot more to replace it now than it would have two years ago. This is why we’re urging all strata committees and body corporates to review their sum insured to help ensure the building insurance cover accurately reflects today’s replacement cost.
Strata committees or body corporates that haven’t insured their buildings for replacement value are breaking the law. State and territory Acts say a building should be insured for its replacement value and lack of compliance presents several risks: not just to owners but to strata committee and body corporate members as well.
If a building is underinsured, and experiences major damage or total loss from an earthquake, owners would pay the difference to replace it. For example, an apartment building worth $5m, and insured for $3m, means owners would have to pay the $2m gap from their own pockets to rebuild the property if it was destroyed in a total loss event.
An underinsured building can also potentially put a strata committee or body corporate at risk of legal action from the wider ownership group if major damage is done to a property and negligence can be proved. For example, if a strata committee, or a corporation, decides to reject the body corporate manager’s recommendation to arrange a building valuation, the owners who weren’t at the meeting could potentially make a claim against the committee if an insured event occurs and the building is underinsured. In the event of legal action, the committee may be found to have been negligent in their duty and can be sued.
The cost of a valuation can be a deterrent for some strata committees and body corporates but, the fact is, building valuations for insurance purposes aren’t as pricey as you might think. The average cost of a valuation for a property comprising five to 10 units is less than $300 plus GST and can be paid for from either the administration fund or sinking fund. When you weigh that outgoing cost of a few hundred dollars against the risk of being underinsured and having to potentially pay hundreds of thousands more if something goes wrong, it’s an easy expense to justify.
We know of strata committees and body corporates that haven’t reviewed their building insurance for 15 years so, if their building was badly damaged or experienced a total loss event, they may be underinsured and at risk. The good news is that this threat can be eliminated in a few simple steps. We recommend a strata committee or body corporate asks its body corporate manager to engage a professional property valuer, and complete a building valuation, prior to the AGM or before the building’s insurance is due.
Strata committees and body corporates in most states and territories have the authority to instruct their body corporate manager to engage a valuer and complete the valuation before the AGM so owners can discuss, and approve, their building’s insurance when they meet. When a decision is made, the strata committee or body corporate will then oversee the building insurance policy that’s agreed to at the AGM on behalf of the ownership group.
If you think higher property prices automatically equate to higher building insurance valuations and more expensive premiums, think again. What your property is worth on the real estate market has no impact whatsoever on the building insurance premiums you pay. A building valuation for insurance specifies what it will cost to replace, and rebuild, a building in today’s market should a total loss event occur. The building replacement cost is not related to the market price that may be obtained if the whole property was sold.
The word from the insurance industry is that we’re currently in a ‘hard’ market. Rising costs for insurers means they’re increasing their premiums and becoming more selective when it comes to what they will – and won’t – cover. Equipped with more sophisticated quoting systems, insurers are asking more questions than they did 10 years ago and rating risk differently as a result. Underinsurance is a major red flag and insurers have reached a point where they may even refuse to insure a property that’s valued for less than what it would cost to replace because it’s deemed too much of a risk.
One way to stay on your insurer’s good side and maintain affordable premiums is to maintain your property. If a strata committee or body corporate doesn’t undertake regular maintenance, it’s harder to secure insurance and the excesses that need to be paid will rise. A strata committee or body corporate that looks after its property is less likely to have a claim and which means premiums may not increase at the same level as a corporation that makes a lot of claims.
Whittles are the experts when it comes to helping strata committees and body corporates review and update their building insurance.
Building insurance is a specific agenda item for every AGM so owners can discuss it every year. We will guide you through the process of engaging a trusted property valuer who can undertake a valuation to establish what it would cost to replace your building in today’s market.
We can also connect you with our in-house insurance broker MGA Insurance to help you get a competitive premium. As one of Australia’s largest privately-owned insurance brokers, MGA Insurance has the buying power to provide competitive quotes and it also has the resources and people power to attend to claims quickly.
It’s important to say most strata committees and body corporates treat their insurance with the respect it deserves but due to rapidly escalating building replacement costs, we’re concerned there will be some who could get caught out. Please don’t let it be you.
Would you like to review your building insurance? Contact your closest Whittles branch and speak with a member of our team.
Updated: 9 May 2023