Strata properties in Western Australia are commonly recommended to conduct a regular building valuation every five years. However, if your property hasn't been valued in the last two or three years, there's a likelihood that the building is underinsured. Underinsurance occurs when the insured amount doesn't cover the actual rebuilding costs, leaving properties exposed in the event of a major claim.
Understanding Underinsurance
In the past 5 years, underinsurance has become a significant risk issue in strata across Australia. It happens when the sum insured falls short of the true cost of rebuilding, making properties vulnerable during significant loss events. Regulations across most Australian states, including WA, suggest building valuations should be conducted every five years. However, given the current market conditions, inflation rates, and other factors affecting rebuilding costs, it's vital to ensure your ‘sum insured’ accurately reflects the real cost to rebuild in case of a disaster.
Strata Regulations in Western Australia
In Western Australia, strata schemes are governed by the Strata Titles Act 1985 and the Strata Titles (General) Regulations 2019. Key requirements include:
Mandatory Insurance: Strata companies must insure buildings for their replacement value, covering damage and destruction. This includes all insurable assets of the scheme, as mandated by sections 97 to 99 of the Act (page 40 of the Landgate document).
Valuations: Valuation advice must be obtained from a licensed valuer.
Maintenance Plans: Strata companies must prepare a 10-year plan for common property and update it every five years.
Rising Construction Costs
In recent years, construction costs have been on the rise, influenced by inflation and market dynamics. Factors such as council and government regulations, unexpected delays, and construction complications can further drive-up costs. According to CoreLogic, an approximate breakdown of construction costs is as follows:
Materials: 40-45%
Labour: 35-40%
Taxes and Overheads: Professional fees and other charges
Profit Margin: An allowance for profit
Post COVID-19, Australia has seen significant inflation and cost-of-living increases. Coupled with material and labour shortages, global unrest, and extreme weather events, the cost and time required for construction projects have risen substantially. Regular valuations can mitigate underinsurance risks by ensuring your ‘sum insured’ keeps pace with these rising costs.
Valuation Considerations
An accurate building valuation ensures that your insurance coverage is sufficient for actual rebuilding or repair costs. This helps property owners minimise the risk of being underinsured, providing peace of mind. A comprehensive valuation considers various aspects, including:
The cost of buildings and common areas
External features and permanent fixtures within each lot
Allowance for cost escalation over time
Additional expenses like professional fees, regulatory compliance, demolition, and debris removal
This thorough approach ensures that your insurance covers all potential rebuilding costs, providing peace of mind to owners and strata managers.
Benefits of Accurate Building Valuations
Reducing Financial Risk: Underinsurance can lead to significant financial strain if a disaster occurs, and the insurance payout is insufficient to cover rebuilding costs.
Avoiding Insurance Disputes: Accurate valuations can help prevent disputes with insurance companies over coverage adequacy. Professional valuations provide evidence of the property’s true value, avoiding conflicts during claims.
Obtaining a Building Valuation
CHU suggests the following steps:
Engage a reputable valuer experienced in strata property assessments. They will conduct an independent assessment considering factors like location, construction type, and building regulations.
While WA regulations suggest valuations every five years, more frequent reviews are recommended in the current inflationary market.
Regularly review your insurance policies to ensure the building sum insured aligns with the latest valuation and any renovations that may have been completed and not included in the building sum insured. Consult with an insurance broker to understand coverage limits and additional provisions needed.
Protection When It Counts
Regular valuations help minimise risk and safeguard your strata investment. Whether for minor repairs or major reconstruction, having the right insurance coverage is crucial. It ensures adequate support for claims and protects against the financial implications of catastrophic events requiring a total rebuild.
At CHU, we understand the critical role regular valuations play in protecting strata communities. We are committed to helping owners and managers navigate the complexities of insurance and ensure their properties are adequately covered.
If you would like more information about underinsurance and the importance of regular valuations, to ensure the residential strata insurance is adequately protecting the property.
For more information on residential and commercial strata insurance, visit www.chu.com.au or contact our team of experts.
Disclaimer: Insurance issued by QBE Insurance (Australia) Limited ABN 78 003 191 035 and distributed by CHU Underwriting Agencies Pty Ltd ABN 18 001 580 070 AFSL 243261. Any advice in this article is general in nature and does not consider your personal objectives, financial situation, and needs. Please read the relevant Product Disclosure Statement (‘PDS’), Financial Services Guide (‘FSG’), and the Target Market Determination (‘TMD’), which can be viewed at www.chu.com.au or obtained by contacting CHU directly. CHU Services Pty Ltd t/as CHU Inspect (ABN 99 616 086 269).
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This article was brought to you by CHU Underwriting Agencies
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