We received this question about building sum insured and Strata properties. The following response has been provided by Renee Cassidy, Whitbread Insurance Brokers.
Question: How does owners corporation insurance in Victoria work? What is building sum insured? Would insurance cover our building if several units burn to the ground and we discover we are underinsured by 1 million?
I have a question about owners corporation insurance in Victoria.
I’m having difficulty convincing lot owners to pay for a valuation for our 21 unit complex. They flatly refuse to get a valuation.
I want to know how owners corporation insurance in Victoria works. Does the insurance cover our 21 units if we have several units burn to the ground and we discover we are underinsured by 1 million, for example?
The OC manager claims that if we have $7million cover and are not adequately covered, one or two units burn down, we are fully covered by insurance. It is an issue if the whole complex burns to the ground if we are not adequately covered. She claims it works differently to house insurance. If one or two units burn down and we are underinsured, we are covered, if the whole complex burns to the ground or flooded, and we are not adequately covered, the owners will need to cover the cost of the shortfall.
Our last valuation was in 2014. The lot owners agreed to increase the insurance from low $6 million to $7 million. It was a guess. A committee member suggested I get additional insurance to ensure I am covered. I responded and suggested we get a valuation to ensure we are adequately covered. They were more concerned about maintenance issues. There is no point in getting additional insurance if the OC part is underinsured.
Many of the lot owners believe that we are adequately covered. They are not experts in this field. I expressed many times that I am very concerned about guessing the insurance value. They would not budge. They would not pay for a valuation – I am hoping VCAT will review their decision and overturn it.
Would you please explain to me if we are underinsured by $1 million for example and a unit burns down, will the unit be rebuilt? OR Being underinsured means just that, the unit that burns down will not be rebuilt until the owners pay for the shortfall in the OC insurance? I will be taking this to VCAT in Victoria.
Answer: When it comes to Strata Insurance, the claim amount paid for any loss / damage to the building will not exceed the total Building Sum Insured noted on the policy schedule.
When it comes to Strata Insurance, the claim amount paid for any loss / damage to the building will not exceed the total Building Sum Insured noted on the policy schedule. If a strata property is underinsured, it means the Building Sum Insured on the insurance schedule is less than the total cost to reinstate and replace the building in a total loss.
In order to determine the correct Building Sum Insured, and avoid breaching the Owners Corporation Act 2006, a Professional Property Valuation should always be sought (The scenario above is addressed in a) below).
What can happen if a strata property is underinsured?
- A partial loss occurs and the building is underinsured (scenario from the question)
The Strata Insurance claim payment to reinstate the unit will never exceed the total Building Sum Insured noted on the policy schedule.
If the building is underinsured by $1M, and a single unit burns down, but the cost to rebuild is less than the Sum Insured, the unit can be reinstated.
Alternatively, if the cost to rebuild is more than the Building Sum Insured noted on the strata policy, it’s likely the insurer will simply pay out the total Building Sum Insured amount to the Owners Corporation (OC) / Strata Manager, to be distributed to affected lot owners. The lot owners will then need to make a decision on how to proceed forward with replacement of the unit. Note: The latter is highly unlikely unless the building is grossly underinsured.
- Total loss and building is underinsured
If a total loss occurs and the Building Sum Insured is insufficient, all lot owners would be ‘out-of-pocket’.
In this scenario, we anticipate that the insurer would pay out the Building Sum Insured noted on the policy schedule to the OC or Strata Manager, who would then allocate to each owner based on their ‘lot liability’. It would be up to the owners to then decide how to proceed, and whether they can even afford to reinstate the property. In such circumstances, it is likely that owners may commence legal action to recoup their financial losses, alleging a breach in professional duty by the OC, Committee Members and/or Strata Manager. This is explained further below.
The OC, OC Committees, and Strata Managers have a legal obligation to ensure adequate Strata Insurance is in place
As mentioned in the response from Tim Graham, and in line with the Owners Corporation Act 2006, all Owners Corporations’ have a legal responsibility to take out Strata Insurance that is sufficient to reinstate and replace all buildings on the common property.*
Unless the sum insured is at least equivalent to the cost required to replace, repair or rebuild the property to a similar pre-loss condition, plus incidentals, the OC will be in breach of its obligations. To avoid breaching obligations, it is prudent to gain a Professional Building Valuation, ensuring adequate Strata Insurance sums insured are noted on the insurance schedule.
* Two Lot Strata Properties are exempt from this
Potential legal exposures
If no professional valuation was sought, and a loss occurs that is greater than the Building Sum Insured noted on the insurance schedule, numerous parties could be held liable for a breach of professional duty. Lot owners who suffered financial loss as a result of inadequate insurance could take legal action against:
- The OC entity
- Committee Members
- The Strata Manager (if applicable)
Obtaining a Professional Valuation comes at a fraction of the cost when compared to the financial losses and litigation that could ensue after an underinsured loss at a strata property. Based on this, engaging a Professional Valuer to provide a property valuation, almost becomes a no brainer.
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Please note this Q&A response is not intended to be personal advice and you should not rely on it as a substitute for any form of advice. Please contact Whitbread Associates Pty Ltd ABN 69 005 490 228 Licence Number: 229092 trading as Whitbread Insurance Brokers for further information.
This post appears in Strata News #212
This information is not intended to be personal advice and you should not rely on it as a substitute for any form of personal advice. Please contact Whitbread Associates Pty Ltd ABN 69 005 490 228 Licence Number: 229092 trading as Whitbread Insurance Brokers for further information or refer to our website.