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I DIDN’T REALISE THAT MY STRATA UNIT WAS ALREADY INSURED!

In Victoria when you purchased your unit you will have received an Owners Corporation Certificate in your Section 32 documentation. This provides all the current insurance details. If the owners corporation (or body corporate in the old language) is not professionally managed you should certainly enquire as to the status of insurance.
Unfortunately, all too often owners purchase their unit and immediately take out building insurance, only to discover that their unit is already comprehensively insured. Not only have they spent money unnecessarily, but have created a potentially dangerous ‘double-insurance’ situation.
The Owners Corporations Act (2006) requires that your strata takes out specialist strata insurance on all the buildings on the Plan of Subdivision. This insurance automatically includes a minimum of $20 million of Public Liability insurance over the common property, which includes the driveway (s).
This comprehensive insurance policy taken out with one specialist insurer ensures the safest and the most cost-effective insurance option. You should be aware that there are some obvious risks if duplicate insurance policies exist.

  • The potential for these insurance companies to dispute which company is liable, holding up repairs for a lengthy period.
  • The specialist policy will have replacement cover whilst the second policy may simply offer a payout, resulting in that owner having to arrange their own re-building.
  • A range of scenarios which can affect two units with a common wall where conflicting insurance policies result in dispute and difficulty.
  • Such scenarios are entirely unsatisfactory if the buildings are connected by common property, resulting in the buildings not being rebuilt at the same time, and disputes about who pays for the adjoining walls and services.
All of the above depend on the buildings being adequately insured. If any of the joined buildings are under-insured then the owners may not get their full pay out, meaning they can’t afford to rebuild.
If in doubt, you should contract a strata specialist for advice.
 

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The importance of Strata Insurance Valuations

Owners Corporations need to be asking themselves whether they have sufficient insurance in place to protect their strata building and property for when the unexpected happens.
 
The law
Under current Victorian strata legislation* an Owners Corporation must insure for its buildings full replacement value, and an independent insurance valuation of the building replacement cost must be completed at least every five years for a prescribed Owners Corporation. Building valuations for strata properties are not only required by law, but they also make good sense. It is a legal obligation and responsibility for an Owners Corporation to ensure that there is no dollar shortfall for the rebuilding of their strata property, should the worst happen. If there is a shortfall, then it is the responsibility of the Owners Corporation to meet this shortfall.
 
Changes in the law:
The long awaited regulatory reform of Victorian strata legislation has finally passed through Parliament and will come into effect on 1 December 2021.
Under the new legislation it will be a legal requirement for Owners Corporations of 3 lots and over to have a building valuation done at least every five years.  This is a big shift as the expiring legislation only stipulated this for “certain prescribed” Owners Corporations.
 
Why you need valuations
Apart from the legal requirements accurate valuations of assets ensures the correct sums insured are in place thereby avoiding the risk of underinsurance or conversely, unnecessary over insurance costs.
 
The level of insurance that is 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.
 
More recently fluctuations in the market for building materials and skilled trade’s people has seen many buildings currently underinsured. Therefore, a detailed valuation will account for more than just the replacement value, they will factor increased building costs due to CPI increases, natural events and other disasters.
 
Plus, in the event of a claim, having a professional insurance valuation can greatly simplify and streamline the claim process.
 
What does an Insurance Valuation cover?
A valuation of a strata building for a replacement cost assessment should include:

  • Cover the buildings, common property and each lot’s fixtures and improvements
  • Public liability insurance for the common property
  • Other factors including 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.
 
Additional things to consider with an Insurance Valuation
Often, there’s a dangerous assumption that the valuation covers all scenarios but this is simply not the case. It’s worth checking that your instructions to a professional valuer are clear and complete and:
  • Covers the known and anticipates the undisclosed e.g. upgrades to fixtures and improvements for every lot within your strata block’
  • Considers any environmental hazards, planning/restrictions or dangerous materials which may prevent the building being rebuilt or delay the rebuilding process,
  • Anticipates the rise in costs of labour and materials – remembering that the rise in rebuilding costs outstrips the rise in CPI by almost double.
  • Allowances for cost escalation caused by floods, cyclones and other disasters
 
It is also important to note:
  • That a valuation is carried out frequently - every two to three years is a common practice among strata properties
  • Your Building Sum Insured amount is reviewed each year between valuations in light of events that could impact building and repair costs.
 
This article was supplied by CHU Underwriting Agencies
1300 361 263


*Owners Corporation Act 2006
 
CHU Underwriting Agencies Pty Ltd (ABN 18 001 580 070, AFS Licence No: 243261) acts under a binding authority as agent of the insurer QBE Insurance (Australia) Limited (ABN 78 003 191 035, AFS Licence No: 239545). Terms, conditions, limits and exclusions apply to the products referred to above. Any advice in this article is general advice only and has been prepared without taking into account your objectives, financial situation or needs. Before making a decision to acquire any product(s) or to continue to hold any product we recommend that you consider whether it is appropriate for your circumstances and read the relevant Product Disclosure Statement which can be viewed on this website or obtained by contacting CHU directly.
 
Date issued: June 2020

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Strata Insurance Market Update


26 Oct 2023

Buildings with defects received the most challenging premium increases and imposed policy conditions in Q1 on top of facing challenges with obtaining insurance.

Key Insurance Outtakes from Q1

Since the start of FY24, strata premiums are increasing nationally by about 15-20%. These increases are driven by claims costs inflation, rising building valuations, and insurers raising rates after periods of losses. Looking forward, committees, lot owners, and body corporate managers should anticipate premium hikes of 15-20% for clean claims records and up to 30% for those with challenging claims histories. Occasionally, premiums for desirable risks have begun to stabilise due to underwriters re-entering the market with new risk appetites and Northern South East Queensland receiving benefit from the ARPC Cyclone Pool.

 

Buildings with defects received the most challenging premium increases, imposed policy conditions and challenges with obtaining insurance. Strata managers and owners should work closely with insurance brokers to communicate clear action plans and regular progress updates to insurers for known issues such as open claim causation maintenance or defects.  

 

International Insurance Markets can provide an alternative for insureds when local insurers don’t provide cover, but we continue to observe cost-prohibitive premiums.

Buildings in Northern Australia may notice premium relief if eligible for inclusion in the ARPC cyclone pool. The cyclone pool is designed to lower insurance premiums for households and small businesses with high cyclone and related flood damage risk by reducing the cost of reinsurance. All major insurers are required to join the cyclone pool by December 2023 but it remains to be seen if insurer underwriting appetite and capacity in North Queensland will change.  

New Development Trends in Australia's Major Cities

The Urban Development Institute of Australia (UDIA) has released its 2023 State of the Land report, a study into the strata industry for buildings constructed in 2022, and an overview of the new development pipeline in major cities.  

In 2022, multi-unit dwelling completions in capital cities dropped by 3%, totalling 45,429 units, down 45% from the 2017 peak. Meanwhile, the pipeline for new multi-unit supply has decreased by 1% overall, with the most significant reductions in Melbourne, Sydney, and the ACT. Southeast Queensland’s pipeline increased by 12%, driven by 'Early Planning' and 'Under Construction' units, while Perth stabilised with a 3% increase, and Adelaide's pipeline reduced by 3%.

Challenges Affecting Strata New Development Growth

Lending for the construction of dwellings has decreased significantly, with lending for newly erected dwellings also down due to rising interest rates. Further interest rate increases are expected to continue putting pressure on housing market activity in 2024. International supply chain disruptions during the pandemic, rising freight costs and increased construction material costs and shortages have driven up housing construction input costs. Prices of materials like timber, plaster products, and concrete have increased, impacting building costs. The same supply challenges and increased costs for buildings materials that are challenging for developers also impact the insurance industry in relation to claims cost escalation and underinsurance.

New Property Developments – Takeaways for Owners and Developers

Poor Design and Quality
Two decades of declining design and building quality in large multi-level developments have resulted in a host of issues including structural defects, passive fire penetration defects, waterproofing failures, and water ingress issues. Structures containing materials, such as flammable ACP cladding or NRG Greenboard (rendered EPS foam), are attracting higher premiums, the insurer appetite for buildings containing these materials continues to be limited.  

The growing popularity of garden rooftops, rooftop pools, and balcony greenspaces has raised insurer concerns about water membrane failures, maintenance issues, and fire hazards. We have also seen instances where strong winds have blown trees off rooftop greenspaces which is a potential liability exposure. We urge property owners and developers to assess and conduct risk surveys for long-term design and build quality. The Body Corporate should have current maintenance programs in place.  

Each insurer has a set of underwriting guidelines that influence their risk tolerance and in turn, the premiums they offer for new developments. Insurers can change their underwriting guidelines and premium rates, varying from 50%-100% from time of indication quoting until practical completion which can be years later.  

Strategically Timed Insurance Placement

Upon practical completion of the development, the construction insurance policy ceases to provide coverage. At that time a strata policy should be put in place to provide insurance coverage for the building. After the registration of the Body Corporate (BC), the developer must secure insurance for a full year from the registration date. This requires an endorsement to extend the policy's expiry date. Some insurers enforce mid-term policy cancellation and subsequent reinstatement for a full 12 months from the registration date.

A comprehensive insurance valuation should factor in debris removal, professional fees, escalation, and complete rebuilding expenses.

Precise Valuations for New Developments and Existing Strata Buildings

At Honan, we address concerns regarding second-year premium increases within Bodies Corporate following property valuations. Opting for insurance coverage solely based on the project's construction cost can result in insufficient coverage in the event of a total loss. International supply chain disruptions, rising freight costs, and increased construction material costs and shortages have driven up housing construction input costs. In turn, this increases the cost to repair or replace properties in the event of a claimable loss.  

For this reason, a comprehensive insurance valuation should factor in debris removal, professional fees, escalation, and complete rebuilding expenses. We strongly advocate for an independent valuation before practical completion or within 60 days thereafter, ensuring the initial premium reflects the building's complete replacement cost. Existing Strata Buildings should also make sure their valuations are up to date. Individual state legislation and recommendations vary, calling for updated valuations anywhere from 2 to 5 years. Please refer to the relevant legislation for your State / Territory.  

Article Supplied by Honan.