Safe and Sound: Why Up-to-Date Insurance Valuations are Vital for Your Community

Construction costs have sky rocketed in recent years and a critical aspect often overlooked is the accurate assessment of property valuations, especially concerning insurance coverage. In this article, we delve into the statutory obligations, risks of under valuation, compliance requirements, and the role of professional valuation services in safeguarding strata communities.

Statutory Duty and Financial Obligations

Under the Strata Schemes Management Act 2015 (NSW), owners within a strata community bear a statutory duty to insure the building for its full replacement value. This responsibility extends to all members of the owners corporation, with joint and several financial liability for any shortfall in insurance coverage compared to the actual replacement cost.

Compliance with Legal Requirements

Sections 160-161 of the Act and regulation 39 of the corresponding Regulations stipulate specific requirements for insurance coverage in strata communities. These mandates ensure that policies cover all buildings, common property, and owners corporation assets for full rebuilding or replacement value. Additionally, policies must cover incidental costs such as debris removal, professional fees, and escalation costs.

Strata Schemes Management Act 2015 - Section 160

160 Owners corporation to insure building

1. The owners corporation for a strata scheme for the whole of a building must insure the building and keep the building insured under a contract of insurance, in accordance with this Division, that insures the building if it is destroyed or damaged by fire, lightning, explosion or any other occurrence specified in the policy (a "damage policy"). (Maximum penalty--5 penalty units.)

2. The owners corporation for each strata scheme for part of a building and any other person in whom is vested an estate in fee simple in part of the building that is not included in the parcel of the strata scheme must insure the building and keep the building insured under a damage policy. (Maximum penalty--5 penalty units.)

3. In any proceedings for an offence under subsection (2), it is a defence to establish that the defendant was willing to join in the insurance of a building under a damage policy but that the policy could not be taken out because another person specified in that subsection was unwilling to join in the application for that policy.

4. This section does not apply to an owners corporation for a strata scheme comprising 2 lots if--

   1. the owners corporation so determines by unanimous resolution, and

   2. the buildings comprised in one of those lots are physically detached from the buildings comprised in the other lot, and

   3. no building or part of a building in the strata scheme is situated outside those lots.

5. A damage policy may consist of one or more policies of insurance.

Strata Schemes Management Act 2015 - Section 161

161 Requirements for damage policy

1. General requirements The damage policy for a building must be with an approved insurer, be in the name of the owners corporation, and any other person required to insure under section 160 and provide for the following--

   1. the building is to be insured for at least the amount determined in accordance with the regulations,

   2. if the building is destroyed, the building is to be rebuilt or replaced so that the condition of every part of the rebuilt or replacement building is not worse or less extensive than that part when new,

   3. if the building is damaged but not destroyed, the damaged part of the building is to be repaired or restored so that the condition of the repaired or restored part is not worse or less extensive than that part when new,

   4. expenses incurred in removing debris are payable,

   5. the remuneration of architects and other persons whose services are necessary as an incident to the rebuilding, replacement, repair or restoration is payable.

2. Limited sum liability Instead of providing for work and payments being made if a building is destroyed or damaged, the damage policy may limit the liability of the insurer in that event to an amount specified in the policy. The amount must not be less than an amount calculated in accordance with the regulations.

3. Parts of building to be covered The parts of a building to be covered by a damage policy include the following--

   1. owners' improvements and owners' fixtures forming part of the building,

   2. a building consisting entirely of common property,

   3. anything prescribed by the regulations as forming part of a building for the purposes of this section.

4. Parts of building not required to be covered The following parts of a building are not required to be covered by a damage policy--

   1. fixtures removable by a tenant at the expiration of a tenancy,

   2. owners' improvements and fixtures comprising paint, wallpaper and temporary wall, floor and ceiling coverings,

   3. anything prescribed by the regulations as not forming part of a building for the purposes of this section.

Strata Schemes Management Regulation 2016 - Regulation 39

39 Manner of calculation of insurance limit under damage policy

1. For the purposes of section 161(1)(a) of the Act, the minimum amount for which a building is to be insured is to be not less than the amount calculated in accordance with subclause (2).

2. For the purposes of section 161(2) of the Act, the amount to which the liability of an insurer may be limited under a damage policy is to be calculated by adding together the following amounts--

   1. the estimated cost, as at the date of commencement of the damage policy, of--

      1. carrying out the work that a damage policy is required to provide for under section 161 of the Act, and

      2. making the payments that a damage policy is required to provide for under section 161 of the Act,

   2. the estimated amount by which expenditure referred to in the preceding paragraphs may increase during the period of 24 months following the date of commencement of the damage policy.

3. The amounts referred to in subclause (2)(a) and (b) are to be calculated so as to include any applicable taxes, fees and charges (including taxes, fees and charges of the Commonwealth).

The Risks of Under Valuation

Underestimating the replacement value of strata properties can have severe repercussions. Inadequate insurance coverage leaves communities vulnerable, with insufficient funds to rebuild or repair damaged structures in the event of a catastrophe. This oversight can lead to prolonged recovery periods, financial strain, and disputes among stakeholders.

The Role of Professional Valuation Services

Professional valuation services play a crucial role in ensuring the accuracy and reliability of property valuations. Experienced valuers have the expertise to assess all relevant factors, including building specifications, market trends, and regulatory requirements, to determine the true replacement value of strata properties.

When calculating the replacement value, the valuer should consider various factors, including:

• Time Allowance: Accounting for the duration required to rebuild the building entirely, considering approvals from local councils and statutory authorities, removal of hazardous materials, delays due to community objections and legal appeals, and other relevant factors.
  

• Property Restrictions: Assessing onerous easements, encroachments, zoning issues, flood risks, landslips, main roads acquisition, and access restrictions.
  

• Debris Removal Costs: Estimating the full expenses for removing and disposing of debris, including contents within the building such as asbestos, lead dust, lead paint, deteriorated fiberglass insulation, cement, and lime dust.
  

• Heritage Restrictions: Factoring in any restrictions or demands imposed on the rebuilding program due to heritage classification, including those set by local council, State government, and Federal government categories.
  

• Professional Fees: Including all fees payable to professionals involved in the rebuilding or replacement process, such as architects, engineers, electricians, surveyors, and lawyers, along with associated costs for terminating existing schemes, authorising new plans, and covering court expenses, including appeals.
  

• Surge in Costs: Allowing for increased costs resulting from material and labor shortages due to a significant building surge, potentially triggered by major events or catastrophes elsewhere in Australia.
  

• Taxation: Considering the full amount of GST and any other applicable taxes.
  

• Catastrophe Coverage: Providing a suggestion on the percentage increase needed to cover potential catastrophic events adequately.
  

• CPI Increase: Allowing for an increase in the Consumer Price Index (CPI) that may occur during the rebuilding period.
  

• Property Upgrades: Accounting for any necessary upgrades to the insured property to comply with current construction codes and regulations.

Benefits of Up-to-Date Insurance Valuation

Maintaining up-to-date valuations offers numerous benefits to strata communities:

• Financial Protection: Accurate valuations ensure adequate insurance coverage, protecting against financial losses.
  

• Risk Mitigation: Identifying and addressing potential gaps in insurance coverage helps mitigate the risk of underinsurance and associated liabilities.
  

• Transparency and Accountability: Regular valuations promote transparency and accountability, instilling confidence among owners and stakeholders.
  

• Effective Decision-Making: Armed with accurate valuation data, strata committees can make informed decisions regarding insurance policies and risk management strategies.

Accurate property valuations are essential for protecting strata investments and ensuring financial security. By adhering to statutory obligations, complying with legal requirements, and engaging professional valuation services, strata communities can mitigate risks, promote transparency, and safeguard their assets for the future. Partnering with top-tier strata insurance brokers and valuers, Compass Strata ensures comprehensive protection and accurate valuations for you. Let's prioritise accurate valuations to build resilient and prosperous communities.