Strata Schemes Management Regulations 2010, Part 3
According to CHU Underwriting Agencies, the revisions of the Regulations presented an ideal opportunity to tighten up on the suggested method of calculation for strata building sums insured. As the manner of calculation in the Regulations remains relatively unchanged, it leaves the method of calculation open to interpretation.
This could potentially leave the lot owner underinsured even though the intent of the Act [Strata Schemes Management Act 1996] is clear and talks about '.......in a condition no worse or less extensive than when new.....', which in insurance terms is often referred to as reinstatement.
In some situations when a loss or damage occurs to strata buildings, this will require the repair or replacement using the same materials as used in the original building. To employ the same materials , or 'reinstate', will generally cost more than replacing with 'equivalent' or 'similar' materials. So, policies that do not consider the cost of replacement with the 'same' materials can, in some circumstances, leave the Owners Corporation exposed to under-insurance.
This ultimately exposes the unit owners' assets with their unlimited liability status and leaves them to mop up any financial shortfall.
Case Study A:
An Owners Corporation has a valuation completed for insurance purposes. This states it is for building 'replacement costs' only. The Owners Corporation uses the valuation to set the sum insured amount for its stat building insurance policy. The building is badly damaged and the local Council insists that the heritage listed granite facade is repaired by taking it down, cleaned and all damaged parts 'replaced' using the same materials i.e. reinstatement. The 'replacement costs' valuation only covers materials that are 'equivalent' and 'similar' but not the 'same'. The Owners Corporation incurs additional costs of $1,000,000 which exceeds the building sum insured amount. So, under this scenario, the Owner's Corporation would face the prospect of financing the total shortfall in cover.
CHU also has concerns about the method of calculation in the Regulations which ignores the cost of restoring a partly damaged building. Under some scenarios, it can be less costly to rebuild the whole building than to reinstate or replace a partly damaged building. Again, this method of calculation has the potential to leave the Owners Corporation exposed, unnecessarily, to under-insurance.
Case Study B:
A strata plan of 4 villas sustained major damage to 3 of the buildings. Due to the requirement to 'repair' the damage ot hte condition no worse than when new, this resulted in building 3 new villas but matching them into the single un-damaged villa. Because of this added complexity, the repair bill came in above the sum insured figure in the policy i.e. it was actually cheaper to rebuild the entire block than to partially rebuild it. Again, any financial shortfall would have to be raised by the Owners Corporation - from lot owners.
Another important area for lot owners in the Regulations is clause 12.1(b) which states that an 18 month period, following the date of commencement of the policy, caters for estimated increases in expenditure. This means that should a loos occur at the end of an insurance period, this would allow for just 6 months in any escalation in costs.
In reality, the reinstatement of a building is likely to be closer to 2 years or more. Also, the fact the sums insured levels are based on valuations that could be up to 5 years old, will compound this issue.
Unnecessary risks:
CHU would recommend Strata Managers and Owners Corporation continue to exercise care when:
- accepting a building sum insured amount that does not cater for both replacement and reinstatement costs.
- the sum insured calculation is for a total loss situation only and does not cater for a partial loss/worst case scenario.
- the time allowance for escalation of costs is restricted to 18 months from the commencement of the policy.
The concern here is that all these issues have the potential to translate to a significant and unnecessary exposure for Owners Corporations, Lot Owners and all involved with insurance valuations. If you would like more information about this, or if you have ownership of a property through a strata arrangement, please contact our office and one of our brokers will be able to assist you. You can contact our office by phone on 02 9894 9155 [option 2], or by email to general@taggartgroup.com.au.
The most appropriate level of cover is a matter for the Owners Corporation to decide. This is general advice only and should not be relied on as a substitute for detailed advice for formulating decisions. Commentary taken from the CHU Update article dated September 2010.