Insurance – how do we stop the spiralling costs?

In NSW, all strata schemes are required to be insured for the full replacement value, as well as public liability cover of at least $10 million. Similar laws are in place in other jurisdictions around Australia.

To assist this process, the law requires schemes to be valued every five years by a registered valuer or quantity surveyor. It is fair to suggest that many schemes are underinsured, particularly in the period between valuations. For example, a scheme may be insured for $2 million based on a valuation. However, three or four years later the value of the scheme may have risen to $3 million or $4 million but the insured value may not have changed. As a result, there will be inadequate funds available to reinstate or replace the property in the event of a major disaster.

It has been suggested that one option could be to increase the requirement for a valuation to every two or three years. However, this would add extra costs for schemes. Another option could be for the insured amount to be indexed annually by some formula that may reduce the likelihood of schemes becoming underinsured.

The five-year valuation requirement can mean that owners become complacent about their insurance needs. A number of other jurisdictions (for example, New Zealand) do not require periodic valuations. Some argue that common sense and the fear of a lawsuit for underinsurance should be incentive enough for regular valuations, without the law needing to dictate to schemes how often they should be done. Another approach is that taken in Queensland where schemes are required to disclose details about the insurance in notices for each AGM, including details about the most recent valuation. This may help to focus the attention of owners on insurance and the value of their shared assets on a regular basis.

What needs to be insured? The National Disaster Insurance Review earlier last year looked at the issue of strata insurance in the wake of Cyclone Yasi in Northern Queensland. A number of submissions to that review suggested that strata insurance risks becoming unaffordable for many schemes.

One element that affects the cost of premiums is what is covered by the policy. The law in NSW currently requires policies to cover most owner improvements and fixtures (such as kitchen cupboards, toilets etc). However, some other jurisdictions take a different approach. For instance, South Australia excludes owners’ fixtures and fittings. It has been suggested that adopting similar measures in NSW may help to lower the premiums for schemes. It would also address the issue of ‘double insurance’ as such items are already covered by owners who have home and contents insurance policies. Tenant fixtures are currently excluded by the law from being covered by the scheme’s insurance.

The law in NSW sets out a number of incidental matters that must be covered by all policies (like the cost of removing debris and employing architects). These would be standard features of most policies and the need for the legislation is unclear. Other incidental matters, such as temporary accommodation expenses for owners and tenants, are not required by law. A large impact on the cost of insurance is the excess payable in the majority of policies. In NSW most policies would have an excess in the hundreds of dollars. Most claims are for amounts less than $1000. Encouraging or requiring schemes to have a higher excess payable could reduce the number of claims and, in turn, the overall cost of insurance.

Exemptions from compulsory insurance – Under the current law only two lot schemes can agree not to be insured and then only if the buildings are physically detached. There is an anomaly in that schemes of more than two lots may be also be physically detached but are still required to be insured under one policy.

Increased premiums based on lot usage – Under the current law where the use of a particular lot (like a café) causes the insurance premium for the scheme to be greater than it would otherwise be, the extra cost can be passed onto the owners concerned (with their consent or by an adjudicator’s order). A similar provision exists in the Queensland legislation. However, it can be difficult to determine exactly how much of the premium is attributable to the use by the lot owner or their tenant.

Public liability cover – Some stakeholders believe that the current $10 million minimum level of public liability insurance is too low. There have been calls to increase the minimum level of cover to $20 million. Others suggest the minimum amount should be $30 million. Increasing the level of coverage would increase costs for schemes. No jurisdiction in Australia currently has a requirement for more than $10 million in public liability coverage.

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