Question: A new valuation shows our building is underinsured by about $6 million. Our strata management wants to wait until renewal to fix it. Is that reasonable?
Our strata company had a valuation done on the property, as requested by the insurance company. The valuation (done six months ago) increased the assessed replacement value from $3.5 million to $9.5 million, so our insurance budget has increased. The annual insurance for our property was paid about 5 months ago based on the older, lower value, and we have been advised that we will not be insured for the higher value until next year. The amount of the increase in the budget is a guesstimate only, and the strata management has not obtained any quotes.
We have queried this with our strata management company, and they advised us that this is an estimate only until the insurance becomes due in seven months. The alternative is to lower the budget to what was paid previously and have a motion to raise an additional amount upon receipt of the insurance renewal. Currently, the building is only insured for around $3.5 million and should be increased to the new build value.
Is it normal to get the valuation but not act on it for almost a year, allowing the strata to be underinsured? Is it normal not to get quotes before increasing the AGM budget?
Answer: If the strata company knows the sum insured is materially below replacement value, waiting until renewal may not satisfy its obligations under section 97.
The relevant legislation is section 97 of the Strata Titles Act 1985 (WA), which provides:
“97. Required insurance
A strata company must ensure that the following insurance is in place for the strata titles scheme:
(a) all insurable assets of the scheme must be insured against fire, storm and tempest (excluding damage by sea, flood or erosion), lightning, explosion and earthquake:
- to replacement value; or
- to replacement value up to, for an event of a specified kind, a maximum amount specified in the contract of insurance that is a reasonable limitation in the circumstances.”
Based on the information provided, the strata company has obtained a replacement valuation indicating that the building should be insured for approximately $9.5 million. In comparison, the current sum insured remains approximately $3.5 million.
There is a potential argument that the strata company may not be satisfying its obligations under section 97 if it is aware that the current sum insured is materially below the building’s assessed replacement value and does not take steps to address the shortfall. For this reason, we would recommend that the strata company discuss increasing the sum insured immediately, rather than waiting until the next renewal date.
In relation to the budget, the more appropriate course of action would be to approach the insurer or broker and arrange for the sum insured to be amended immediately to reflect the current replacement valuation. This would provide the strata company with the actual cost of increasing the sum insured for the remainder of the policy period, rather than relying solely on an estimate or assumption. Alternatively, if the strata company does not wish to proceed immediately, it could seek a quotation for the increase in the sum insured to better understand the likely premium impact.
From an insurance perspective, where a valuation has identified a substantial increase in replacement value and a corresponding underinsurance exposure, the prudent course of action would generally be to increase the sum insured as soon as practicable rather than simply obtaining quotations and deferring any action until renewal. Obtaining a quote may assist with budgeting. However, it does not address the underlying issue that the property may remain insured for less than its assessed replacement value. Amending the sum insured would not only assist in addressing the potential underinsurance exposure. It would also provide the strata company with definitive premium information upon which future budgeting decisions can be based.
This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Shandit Pty Ltd T/as Strata Insurance Solutions strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances and the specific coverage afforded under their policy wording. Shandit Pty Ltd T/As Strata Insurance Solutions is a Corporate Authorised Representative (No. 404246) of Insurance Advisernet Australia AFSL No 240549, ABN 15 003 886 687.
This post appears in Strata News #806.
Tyrone Shandiman
Strata Insurance Solutions
E: tshandiman@iaa.net.au
P: 1300 554 165
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