What building sum insured do you require? If you haven’t increased your amount for a few years, now may be the time!
As part of appropriate due diligence, Bodies Corporate should take the time to review the adequacy of their sums insured when their insurance policy renews.
In the years following the Global Financial Crisis in 2008 until 2015, the inflationary cost to re-build a property was increasing on average by 1% p.a. each year based on statistics widely used within the building industry such as the Australian Bureau of Statistics.
It meant that in some instances increases of 0%-1% p.a. was appropriate. In more recent times, however, annual increases in building costs have started to return to traditional increases and are also playing “catch-up” from prior years.
Advice provided by quantity surveyors suggests that recently the cost of rebuilding a property has increased by 4% p.a. more recently, according to building cost indexes accepted throughout the building industry. This means that bodies corporate who have in the past applied smaller building sum insured increases of 1% or 2% or may have not increased their building sum insured at all, should review their sum insured.
As a basic guide, increasing your building sum insured by 5% will normally cost 3%-4% in additional premium. The cost of underinsuring can be much more severe.
Certain insurance policies have “Coinsurance”, “Average” or “Underinsurance” clauses which mean that in the event a building is underinsured the insurer only pays a portion of the claim which represents the portion that is insured. For example, if you insure your building for 50% of its rebuild value and have a partial loss claim of $10,000 the insurer only pays $5,000 less any other deductions like the policy excess.
While many strata policies do not have these clauses, in a worst-case scenario involving a total loss the property can be underinsured by a significant amount and the owners may be required to make up the difference.
What building sum insured do you require?
If you are unsure about whether or not to increase your building sum insured, it is always better to err on the side of caution and apply an increase and likewise engage a quantity surveyor where appropriate.
Tyrone Shandiman
Strata Insurance Solutions
E: [email protected]
P: 1300 554 165
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. Shandit Pty Ltd T/As Strata Insurance Solutions is a Corporate Authorised Representative (No. 404246) of Insurance Advisenent Australia AFSL No 240549, ABN 15 003 886 687.
This post appears in Strata News #176.
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I have responded to your question in this article: NSW: Q&A How Often Do We Need to Have an Insurance Valuation?
In NSW, does an independent Building insurance valuation supersede the valuation that the Insurance company has placed on the Building ? And is the Owners Corporation required under the legislation to inform the Insurance company of the new valuation ?