What building sum insured do you require? If you haven’t increased your amount for a few years, now may be the time! Tyrone Shandiman, Strata Insurance Solutions.
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.
This post appears in Strata News #176.