How often does your strata committee/body corporate review its building insurance? If it has been more than two years, we strongly recommend reevaluating it. Your property may now be underinsured due to recent increases in building replacement costs.

What is building insurance?

Insurance policies for buildings cover all risk events such as fire, burglary, malicious or accidental damage, earthquakes, etc. Water and storm damage, fire, burglary, burglary, and other insured events are all covered by building insurance. There may also be optional extras available to protect committees against any claims depending on where you live in Australia, including flood and catastrophe coverage and office bearer’s liability insurance.

As far as inclusions are concerned, building insurance includes both the structure of the building as well as any permanent fixtures and fittings, including mirrors, built-in wardrobes, bathroom vanities, and pergolas. In case you break a bathroom mirror or drop a hairdryer and crack your bathroom vanity, you may be eligible to claim repairs through building insurance. Improvements to common property areas, such as landscaping and driveways, are also covered by building insurance.

Building insurance does not cover carpets and curtains. Contents are not covered as they are not part of the structure; tenants or owner occupiers should insure their contents. In addition to the strata insurance covering the leased property, landlords may wish to consider purchasing a landlord insurance policy to ensure additional peace of mind. Curtains, carpets, light fittings and other items that constitute the leased property are not covered by the strata insurance. General maintenance issues like rusty gutters and building defects are not covered by building insurance.

Australian legislation requires that properties and common property be insured for replacement value in most states and territories. Body corporate owners can be fined if the building is not insured. Replacement value needs to include all associated costs, such as demolition, debris removal, and any cost escalations that have occurred during the insurance period.

When it comes to building insurance, are there any differences between residential and commercial properties?

The strata committee or body corporate of a commercial property, such as an office or warehouse, is generally responsible for making sure that the property is covered by the same legislation as residential properties.

It is vital to determine who owns the interior fitout when it comes to commercial building insurance claims: the land owner or the tenant? In most cases, tenants pay for and install their own fit outs, which means they are responsible for insuring them. In the event that the tenant vacates the space without removing the infrastructure they installed before the lease expires, the landlord or lot owner becomes the owner of any remaining fixtures and fittings. As a result, the fit out is covered by the body corporate’s building insurance policy excluding carpets and curtains.

Why is it important to review your insurance now?

The COVID-19 pandemic, the conflict in Ukraine, rising building materials costs, supply chain issues, skill shortages and recent floods in Queensland and New South Wales have all contributed to a significant increase in building replacement costs over the past two years. Over the past 24 months, these factors have driven construction costs up by up to 30 percent.

The cost of replacing your property now will be much higher than it would have been two years ago if your property suffered major damage. Strata committees and body corporates should review their sum insured to ensure that the building insurance cover accurately reflects today’s replacement costs.

What’s the risk of being underinsured?

The law prohibits strata committees and body corporates from not insuring their buildings for replacement value. Strata committees and body corporates must insure buildings for their replacement values under state and territory law, and non-compliance poses several risks to owners and strata committees.

Owners would pay the difference to replace a building that is underinsured if it suffers major damage or total loss in an earthquake. If an apartment building is worth $5 million and insured for $3 million, the owner would have to cover the $2 million gap by themselves if it were destroyed in a total loss.

If major damage to a property is done and negligence can be demonstrated, an underinsured building can also potentially expose a strata committee or body corporate to legal action. If, for example, a strata committee, or corporation, rejects the advice of the body corporate manager to arrange a building valuation, the owners who weren’t there could potentially sue the committee for underinsurance if a covered event occurs. If the committee is found to have been negligent, they may be sued in case of a legal action.

In spite of the fact that building valuations for insurance purposes aren’t as expensive as you might think, they can be deterrents for some strata committees and body corporates. An average valuation for a five-to-10-unit property costs less than $300 plus GST, which can be paid for from either the administration fund or sinking fund. The cost of a few hundred dollars is easily justified when compared to the risk of being underinsured and having to pay hundreds of thousands more if something goes wrong.

What steps should a strata committee or body corporate take to review their building insurance?

In some strata committees and body corporates, building insurance has not been reviewed for 15 years, so if their building is badly damaged or experiences a total loss event, they may be underinsured. Good news! This threat can be eliminated by following a few simple steps. Prior to the AGM or before the building’s insurance is due, strata committees or body corporations need to engage a professional property valuer.

Most states and territories allow strata committees and body corporates to instruct their managers to engage a valuer and complete the valuation before the annual general meeting so owners may discuss, and approve, the building’s insurance policy at the meeting. After the decision is made at the AGM, the strata committee or body corporate will oversee the building insurance policy agreed to by the ownership group.

Are rising property prices causing building valuations and insurance premiums to rise?

It is a common misconception that higher property prices automatically result in higher building insurance premiums and valuations. The value of your property on the real estate market has no effect whatsoever on your building insurance premiums. In the event of a total loss event, a building valuation tells us how much it will cost to replace, and rebuild, a building in today’s market. If the entire property were sold, the market price would not be related to the building replacement cost.

In light of these rising building replacement costs, how are insurers responding?

The word from the insurance industry is that we’re currently in a ‘hard’ market. Rising costs for insurers mean they’re increasing their premiums and becoming more selective when it comes to what they will – and won’t – cover. As a result of more sophisticated quoting systems, insurers are assessing risk differently than they did 10 years ago by asking more questions. Underinsurance is a major red flag, and insurers may refuse to cover a property with less than the replacement cost because it’s seen as too risky.

It is important to maintain your property in order to stay on your insurer’s good side and maintain affordable premiums. In the absence of regular maintenance, a strata committee or body corporate will have difficulty securing insurance and will have to pay higher excesses. It may be that premiums for a strata committee or body corporate that takes care of its property won’t increase as much as those for a corporation that makes many claims.

Strata Management Group have an extensive database of suitable qualified and licensed contractors as we understand the necessity of using compliant contractors, that have all the necessary WH&S and Insurance documentation. Need to lodge a maintenance request or Unsure how to handle your maintenance issue? Visit: https://www.stratamg.com.au/maintenance/

How can SMG help?

The experts at SMG help strata committees and body corporates review and update their building insurance policies.

Every year, building insurance is included on the agenda of the AGM so you can discuss it. We will guide you through the process of hiring a property valuer who can estimate how much it would cost to replace your building today.

Would you like to review your building insurance? Contact us and speak with a team member.

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