Owning a strata property comes with certain responsibilities. There is a requirement upon all Strata Corporations that the property is collectively insured for full replacement value at all times. This is a legislated requirement simply to protect each Member of the Strata Corporation, ensuring that the whole site is insured. This is in reference to Section 30. It is clear that the responsibility is on the Corporation to insure for the correct replacement value of the entire complex, and include all costs which the group may experience in a total loss, for example; surveying, architectural, engineering works or associated and incidental costs. This is very important because, in a total loss, you may find that there are significant costs associated with ensuring that the replacement buildings and structures meet the current building code requirements.
What is the full replacement value insuring?
We talked above about some of the factors which go into determining full replacement value but what are you insuring against? The Strata is insuring against the worst-case scenario, which would be the total loss or destruction of the strata property caused by any number of factors, including but not limited to fire, flood or a natural disaster.
Division 4—Duty to insure
30—Duty to insure
(1) A strata corporation must keep all buildings and building improvements on the site insured to their replacement value.
(2) The replacement value of buildings and building improvements is the cost of their complete replacement including the cost of any necessary preliminary demolition work, any necessary surveying, architectural or engineering work and any other associated or incidental costs.
(3) The insurance must be against—
(a) risks of damage caused by events (other than subsidence) declared to be prescribed events in relation to home building insurance under Part 5 of the Insurance Contracts Act 1984 of the Commonwealth; and
(b) risks against which insurance is required by the regulations.
(4) Any money to which a strata corporation is entitled under a contract of insurance in relation to damage to buildings or building improvements must, subject to any contrary order of the Court, be applied by it in reinstating or repairing those buildings or building improvements.
What is valuation?
Insurance valuation is a report which is carried out by a professional insurance Valuer who is qualified and experienced to review the Strata Corporations body corporate site and determine what the required full replacement value is, taking into account all the various works and incidental costs we mentioned above. These reports are important and when carried out periodically can assist the group in determining the level of insurance a Strata Corporation may require. Members of a Corporation are required annually to consider their insurance needs and determine the level of cover required, but being unqualified to make such an assessment could be detrimental to the group. A valuation undertaken periodically gives the group a solid base from which they can make these determinations.
The valuer will look at the improved valuer of the property and include other factors such as inflation, professional fees, cost escalations, compliance with regulations of building development at current standards, demolition, cost of external items (pavements, fencings, recreation facilities which are on-site) and lastly, the removal of debris. Once they have calculated these items, they will land at a suggested insurance value.
It is important to note that the valuation does have no basis or bearing in relation to the current market value of the property or its existing condition either. The job of an insurance valuer is to value the cost of replacing the building with a new (assuming worst-case scenario that the property must be replaced). The cost to buy or sell your Strata unit or lot is not the value for insurance purposes.
The insurance valuer must apply their industry knowledge which he/she possesses and incorporate the various construction cost guidelines into it.
Why is a Valuation Important?
Insurance valuations ideally occur on a recurring and periodical basis to make sure that your property is insured from any unforeseen circumstances.
An insurance valuation is a prudent risk management strategy as it provides for an expert to determine the level of cover required to hopefully ensure the group is insured adequately, thereby removing the additional risk of being underinsured in a total loss.
If a Strata Corporation is under-insured with insufficient value to cover the total loss of the property, then the Members of the group could find themselves needing to bear the liability and costs associated with any rebuild.
An insurance revaluation is highly important to keep your property insured from any circumstances that can occur out of the blue. The value of the insurance required tends to increase with time, as you put different materials, construction costs and professional fees increase each year, these factors must be altered in your coverage to reflect the changes and ensure the group remains adequately covered.
Below is a youtube video which was a chat between our Strata Manager Tony Johnson and one insurance Valuer.
Further below is a link to a document created by SCI insurance which details some of the risks and concerns with underinsurance and the need for valuations.
Startarama Youtube: https://www.youtube.com/watch?v=npYdKNxtUOI